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Peabody Down 4.9% as Goldman Cuts Rating on Weak Coal

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Coal mining company Peabody Energy Inc.’s (BTU) shares lost nearly 4.9% yesterday closing at $13.49. The decline was trigged by a downgrade in Peabody’s rating by investment firm Goldman Sachs (GS) to “Sell” from “Neutral”, citing persistent pressure on the global coal markets.

U.S. based Peabody is a premier coal producer with an exposure in Australia, enabling it to cater to rising demand in the Asia-Pacific region. The company expects a revival in thermal coal demand globally. However, a supply glut along with increasing export volumes from Indonesia, Columbia, Russia and other coal producing countries is putting downward pressure on prices and making the coal export market highly competitive.

U.S. Energy Information Administration (EIA) projects coal export from the U.S. to decline to 96 MMst in 2014 from 118 MMst in 2013. The U.S. coal operators are likely to be affected by the drop in export volumes. China, India and Japan (post Fukushima disaster) are generally the major importers of thermal coal. Going forward, these countries are aiming to focus on alternate energy sources and gradually lowering their dependence on polluting coal.  

In the domestic front, despite having a presence in two of the fastest growing U.S. coal markets, Peabody’s operation is impacted by the ongoing congestion in railroads services in the U.S. Peabody lowered its 2014 U.S. coal sales target to 185–190 million tons from 185–195 million tons to accommodate the loss in sales due to railroad congestion.

On top of it, emphasis on natural gas based power units and alternate sources of power production due to increasing awareness and stricter government regulation are putting immense pressure coal based power generators. Sensing this, one of the coal operators CONSOL Energy (CNX) changed its business strategy and sold nearly half of its coal mines while enhancing its natural gas holdings – a ploy that is returning dividends.

In June this year, the U.S. Environmental Protection Agency proposed a Clean Power Plan, the primary objective of which is to cut down emissions from existing coal-fired power plants by 30% over the 2005 to 2030 time frame. If the proposal is accepted without any downward revision in emission levels, it could hurt Peabody‘s domestic thermal coal sales as coal-fired power units are a major contributor of greenhouse gases. This might force Peabody to think and act in the lines of CONSOL Energy going forward.

Peabody currently has a Zacks Rank #3 (Hold). Another major coal operator Alpha Natural Resources, Inc. (ANR) also shed nearly 7.1% to close at $3.14 yesterday.

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