Challenges facing Peabody Energy’s Australian business

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Import tariff

China’s historically been the biggest consumer of seaborne coal—both thermal and met. Meanwhile, China recently levied a tariff on imported coal. The import tariff ranges from between 3% and 6%. Indonesia is exempt from the tariff due to a trade agreement between the two countries. But the import tariff makes Chinese coal more competitive, and favors the Chinese coal industry over the seaborne market.

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Australia’s in talks with China to reach a trade agreement. If a deal goes through, Australian producers may get an exemption from the import tariff. As a result, Australian coal producers (KOL) such as BHP Billiton Limited (BHP) and Peabody Energy Corporation (BTU) will benefit over American coal exporters such as Alpha Natural Resources, Inc. (ANR) and Walter Energy, Inc. (WLT). If a deal does not go through, however, Australian coal producers will be at a disadvantage to Indonesian producers.

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China’s changing energy policy

As we explained in our series, Will changes in China’s economy impact US coal producers?, China’s energy policy is changing. China’s focusing more on cleaner fuel sources, notably nuclear energy, solar, and wind power, to fire the growth engine.

China announced an import ban on high-sulfur, high-ash coal, effective 2015. Since Australian thermal coal contains high levels of sulfur, the ban is expected to hit Australian thermal coal exporters, Peabody Energy included. China’s coal imports are down so far in 2014 compared to the same period last year. Imports fell for the first time since China became a net importer.

Slowing China

Aside from concerns about a changing energy mix, met coal exporters around the world are also anxious about a slowing China. China’s economy grew at 7.3% in the third quarter—that’s the slowest pace in five years. And China’s steel production is expected to peak by 2017–18, which poses challenges to met coal exporters.

Other key challenges facing Australian coal producers include an overcrowded Pacific market, and overcapacity due to both Australia’s and Japan’s decisions to restart nuclear generation.

Though China is presenting a challenge to coal producers such as Peabody Energy, India remains a bright spot. We’ll look at that, next.

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