Peabody sends PRB coal to Europe, eyes new W Coast port

19th October 2010 By: Liezel Hill

TORONTO (miningweekly.com) - US coal producer Peabody Energy is exporting production from its Powder River Basin (PRB) mines to Europe, and expects to see increasing markets for the coal as resource hungry Asian markets put pressure on global supplies.

The company is already sending some PRB coal through existing ports to Europe, Chile and Asia, and is looking seriously at a big new coal export facility on the West Coast, CEO Gregory Boyce said on a conference call.

"We continue to see a production disconnect, or a supply and demand disconnect over time in the entire seaborne metallurgical and thermal coal market, which will pull coals from anywhere they can," he commented.

While US and European demand may remain muted until about 2012, Peabody believes the global coal industry "is in the early stages of a long-term supercycle, led by China and India", Boyce said earlier.

Peabody has already contracted 90% of its 2011 production from the PRB mines, but has volumes available for 2012 and 2013.

PRB coal, which Peabody produces from three big surface mines in Wyoming, is relatively low cost to mine, but has historically been sold to domestic power utilities because of the high transport costs to ship it to the coast and then to export markets.

On the other side of the world, coal producers in Australia, including Peabody, are ramping up production to take advantage of strong demand for both thermal and steelmaking coal from China, India and other Asian economies.

And coal from places like South Africa and Colombia - traditionally headed to Europe - is also getting sucked in with the Asia-bound tide, which means European utilities are looking elsewhere to ensure supply.

"They look at it as a diversity in the supply base. Historically, Europe had South African and Colombian coal all to itself and that coal is just strongly getting pulled into the Pacific Rim," Boyce said.

"And I think that the UK and some of the other European consumers are starting to say, well we probably need to test what the other opportunities are, particularly PRB, for coal into Europe."

With strong demand from Asia underpinning prices, returning consumption in Europe and expectations of decline in Central Appalachian coal mines in the US, Peabody is looking at building a big new port facility on the West Coast to ship PRB coal overseas.

"The port on the West Coast is something we are going to spend a lot of time on and we hope [it] has got a high probability of eventually coming to pass," Boyce said.

"There is no question that a major new port out of the west coast could positively impact on the PRB dynamics.

Peabody said in June that it had narrowed down potential sites for a West Coast port, and had begun detailed engineering work.

It was also holding discussions with customers and counterparties from Asia that might be interested in participating in the project, president Rick Navarre said in a presentation at the time.

PRB coal prices have risen 60% in the year to date, Peabody said on Tuesday.

AUSTRALIAN WEATHER

Peabody has been ramping up production at its Australian mines, and third-quarter earnings before interest, tax, depreciation and amortisation from the operations nearly tripled year-on-year, to $323,2-million, after volumes and prices both rose and costs improved.

The company was able to mitigate some of the effects of heavy rainfall in New South Wales and Queensland by drawing on surface stockpiles, but still saw implications of production, as well as logistics and transportation, Boyce said.

The weather-related impacts will probably also show up in the fourth-quarter numbers, he said.

"We will probably see a stronger performance out of the US and a more muted year-end performance out of Australia."

There are some indications that the hard coking coal price of $209/t settled with customers for the fourth quarter might be "a little bit low" by the time negotiations begin for the next quarter, Navarre said.

The Australian weather disruptions have resulted in more tightness in the market, and the negative effects of currency movement on Australian producers will also likely flow into the price settlements, he said.

Shares in Peabody Energy, which said on Tuesday it doubled third-quarter net income, slipped 2,06%, to $50,47 apiece by 15:53 in New York.