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Peabody Energy CEO Remains Confident on Coal Demand, Prices

10/26/2012 | 03:16am US/Eastern

By Robb M. Stewart

MELBOURNE--Cancelled and postponed coal projects in eastern Australia may lay the ground for a jump in prices and a quick resumption of exploration when market conditions improve, the head of U.S. coal producer Peabody Energy Corp. (>> Peabody Energy Corporation) said Friday.

"What we have got now is Europe in recession, the U.S. in extremely low growth and China decelerating. I don't think all three of those events will continue forever," Gregory Boyce, chairman and chief executive of Peabody, said in an interview.

A sharp fall in prices for steelmaking metallurgical coal and power-generating thermal coal from last year's peaks has pushed mining companies to retrench, cutting hundreds of jobs in Australia alone and cancelling or delaying plans for new mining developments. Peabody this year put on hold three projects in the country, while rivals including BHP Billiton Ltd. (>> BHP Billiton Limited), Rio Tinto PLC (>> Rio Tinto plc) and Xstrata PLC (>> Xstrata PLC) have also laid off workers and postponed developments.

"What happens when that demand comes back and we haven't invested? Prices are going to have to rise again," Mr. Boyce said. "I can't predict how high they are going to go, but I certainly see the scenario being set up with the pullback in investment today of price spikes in the future."

Australia supplies roughly 60% of the world's metallurgical coal trade by sea, as well as significant volumes of thermal coal, benefiting from a rich resource in Queensland and New South Wales states and a closeness to markets in Asia.

Mr. Boyce earlier Friday told a mining industry luncheon in Melbourne the long-term market fundamentals for coal remained strong, despite the current headwinds of weak prices and rising costs.

Peabody on Monday posted an 84% fall in its third-quarter net profit, but raised the bottom end of its full-year sales forecast to between 240 million and 250 million tons from a previous estimate of 230 million to 250 million. Coal shipments from company's Australian operations reached a record 8.5 million tons in the quarter.

Mr. Boyce said annual world coal demand is expected to grow by about 1.3 billion tons in five years, dominated by China's and India's need for coal-fueled power generation and steel. China's demand for coal is likely to grow by about 1 billion tons alone by 2016, he said.

Still, Mr. Boyce joined a chorus of mining executives critical of the cost pressures and red tape they say is undermining investment in Australia. He said more than half of Australia's coal mines have costs above global averages as wages have soared and the local currency has strengthened against the U.S. dollar. There also has been a sizeable increase in state and federal taxes and royalties, as well as increasing delays in receiving mine permits, he said.

In the long-term, Mr. Boyce said he still sees investment opportunities in Australia. Industry spending on coal exploration could resume quickly if the market recovers in 2013, he added.

Peabody has put on hold the expansion of its Metropolitan metallurgical coal mine and Wambo open-pit thermal coal mine, but Mr. Boyce said reinventing those projects could be done fairly quickly. There also is an indefinite delay of the 3 million ton-a-year Codrilla pulverized injection coal project.

Mr. Boyce said labor and capital costs could recede now that projects across Australia have been postponed, which could be a benefit if Peabody moves to restart its own developments.

He added Peabody continues to push ahead with the planned sale of its Wilkie Creek mine in Queensland, although the process has taken longer than anticipated. The company in September had said discussions with interested parties were ongoing.

Write to Robb M. Stewart at robb.stewart@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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