Alpha Natural, Coal Stocks Jump On China Infrastructure Plans

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Trefis
ANR: Alpha Natural Resources logo
ANR
Alpha Natural Resources

The recent euphoria in the coal mining community is not without reason. After a long time there finally came something for the coal companies to cheer about. This time China has brought the much needed impetus to the coal stocks. China’s economic planning agency has approved for 25 subway projects, 13 road construction projects, five port projects and two waterway projects. [1] Many analysts estimated the cost of the projects at anywhere between $156-158 billion. This indicates that a surge of met coal demand from China is in the offing. Alpha Natural Resources‘ (NYSE:ANR) stock jumped more than 15% within 2 days of the announcement, more than any other coal stock did. Let’s see how will this event impact Alpha Natural Resources’ stock price.

We have a price estimate of $9 for Alpha Natural Resources, implying a 30% upside to the current market price. The stock price has been extremely volatile lately because of concerns over the company’s ongoing business in the U.S.

See Full Analysis for Alpha Natural Resources Here

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Most of the infrastructure projects China has approved are highly steel-intensive. Hence, the demand for metallurgical coal, which is used for steel production, will likely tick higher in the near future. Moreover, this could also help lift global met coal prices, which took a beating earlier in the year primarily due to a decline in the demand from China.

Given the dwindling fortunes of thermal coal in the U.S., this Chinese demand could come to the respite of the coal companies in the U.S., such as Alpha Natural Resources. Until the market demand for coal in the U.S. improves, the companies will have to contend with the rising Chinese demand. Previously, the coal exports from the U.S. have been upbeat, rising close to 31% in 2011. The most significant growth came from Asia. According to the US Energy Information Administration (EIA), in 2011 U.S. exported nearly 107 million tons of coal, of which 25% went to Asia. Metallurgical coal made the highest chunk of all exports, almost 70 million tons of the total of 107 million tons, and Asia was one of the largest importer of met coal. Nearly 28% of the total met coal shipments in 2011, i.e. around 19.7 million tons went to Asia. [2]

Among the exporters, Alpha is one of the largest shipper of coal to Asia, especially in the met coal category. In 2011, the company supplied a total of 16.3 million tons of coal, consisting of 14.2 million tons of met coal and 2.1 million tons of thermal coal. Of the total met coal shipments in 2011, 3.5 million tons went to Asia (implying close to 18% of the total met coal shipments from the U.S. to Asia). In 2012 H1, the company has already shipped 3.2 million tons of coal to Asia, which is likely to rise even further in the second half.

Undoubtedly, a surge in global demand for coal will have the most prominent effect on Alpha Natural Resources. That is why, Alpha’s stock rose the most immediately after the news came through. Alpha has been previously signing long-term agreements with the terminal operators and shippers along the East coast and the Gulf coast to streamline its export operations and this news bodes well with the company’s endeavors.

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Notes:
  1. Beijing Plans Infrastructure Binge, Wall Street Journal, September 7, 2012 []
  2. Most US coal exports in 2011 went to Europe and Asia, energyglobal.com, June 20, 2012 []