Massey to Benefit from Rising Coal Demand from Emerging Markets

Rising global demand for coal and a corresponding hike in coal prices have lifted Massey Energy’s (NYSE:MEE) revenues earned from each ton of coal produced. The firm’s revenue per ton has increased from $37 in 2005 to $54 in 2009, and we expect this positive trend to continue going forward led by increasing demand for coal in emerging countries like India and China. Rising crude oil prices are also an indication that coal prices will remain elevated, as coal can be used as a substitute for crude oil in many cases. Massey competes with Peabody Energy (NYSE:BTU) and CONSOL Energy (NYSE:CNX) in the coal industry.

While we expect Massey’s revenue per ton of coal produced will increase to $83 by the end of our forecast period, Trefis members predict revenue will reach $97, suggesting potential upside of 9% to MEE stock. We currently have a Trefis price estimate of $55.08 for Massey’s stock, about 16% below the current market price of $65.61.

Higher Oil Prices, Higher Demand for Coal

There’s generally a positive correlation between prices for crude oil and coal. As crude oil price increases in the future, there will likely be an increase in demand for coal, as coal can act as a substitute for crude oil in many instances such as electricity generation as well as feedstock for chemical and manufacturing companies. In addition, coal is more readily available in many countries, like the U.S., thereby reducing dependence on oil producing nations on the margin.

Increasing Coal Demand from Emerging Markets

China currently accounts for nearly half of global coal demand, in spite of producing almost 50% of world’s coal in 2009, which means that China will be consuming more than it can produce in the coming years. The Chinese government’s decision to set a limit on the quantity of coal produced in the country is expected to further strain the coal demand supply scenario in the years to come.

Apart from China, there is growing demand for coal in India as well. The Indian government is focusing on expanding its coal-fired power generation capacity to meet its ever-increasing demand for electricity. This is going to put significant pressure on the coal industry in terms of demand as well as technology and infrastructure to support the demand. ^[1] In the longer term, we expect better technology for coal processing, improved infrastructure like ports and transportation to be developed to support the growing demand for coal.

Trefis Community Forecast

Trefis members forecast Massey’s revenue per ton will increase from near $67 in 2011 to $98 by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from $62 to $83 during the same period. The member estimates imply an upside of around 10% to the Trefis price estimate for Massey’s stock.

Our complete analysis for Massey’s stock is here.

1. Coal for emerging economies, MiningWeekly, Nov 26., 2010 [↩]