Thursday, April 23, 2015

Cloud Peak Energy - The Best House In A Bad Neighborhood

This article was first published by Seeking Alpha on April 13, 2015

By Sarfaraz A. Khan. Research Asst. Elena Kaufmann

The price of thermal coal, which is the single biggest source of energy for power generation, continues to deteriorate on the back of excess supply and soft demand. The benchmark price at Newcastle in Australia, the export hub of the commodity, dropped to its lowest level since May 2007 to around $54 per ton on Friday.

The weakness has been driven in large part by the soft demand from China. The Chinese government has been clamping down on coal use for power generation to tackle the rising pollution levels. In addition to this, the country also introduced quality restrictions and other protectionist measures on imports in 2014 to defend the domestic producers. Consequently, last year, China's coal imports dropped for the first time in more than ten years and will likely continue to head lower. In an April report emailed to me, UBS's analysts led by Matt Murphy predicted that China will reduce thermal coal imports "by almost 80 Mt on an annualized basis following peak imports in 2013."

Meanwhile, the U.S. has also been trying to reduce carbon emissions by cutting the use of coal for power generation, which will adversely impact the commodity's demand. The country's power sector is responsible for 38% of the energy-related carbon emissions, more than three-quarter of which comes from coal-based power plants. President Obama aims to slash emissions by at least 26% by 2025 as compared to 2005 levels. The change will be driven, in part, by tougher environmental regulation. The cheap …… read full article at Seeking Alpha