At the start of this year, Peabody Energy, the world’s biggest private sector coal company said it would cut its Australian metallurgical production by 2 million tonnes this year because of the global slump in demand from the steel industry.
Peabody Energy produces coal for the steel industry at its Millennium, Burton, North Goonyella and Eaglefield mines in Queensland’s Bowen Basin and at its Metropolitan operation in the New South Wales Hunter Valley.
It was part of global cuts by the group as world demand plunged, especially from the Chinese, European and US steel industries.
But this week BHP Billiton hinted that perhaps conditions in China might be on the improve with steelmakers’ stocks of raw materials sharply lower. It was enough to send a flicker of hope through commodity markets.
But a week ago, Peabody was hinting that supply cuts were already deep and close to what was needed to match a 20% fall in steel output around the globe.
Then last week the company revealed record full-year 2008 operating earnings of $US1.85 billion (from continuing operations), nearly double prior-year levels.
Net income from continuing operations was $US984.8 million, double 2007’s $440.0 million. Sales for 2008 rose 45% to $US6.59 billion on coal sales of 256 million tonnes of productions.
That sounded good, but like so many companies (Alumina Ltd this week here for example), it was a year in two halves and several markets.
The company said the higher sales came from "increased volumes and improved prices throughout the United States and Australia.
“Revenues per tonne in the United States grew 15%, and Australian revenues per tonne rose 76%, reflecting the higher-priced metallurgical and thermal coal associated with annual contracts that commenced April 1, 2008."
"We are seeing a sharp global supply response to temporarily reduced demand, through voluntary coal supply and capital spending reductions," said Peabody President and Chief Commercial Officer Richard A. Navarre.
"Peabody has trimmed production targets in both the United States and Australia and now enters 2009 with a highly committed book of business.
"We believe the ultimate recovery could be strong, as global economic and electricity generation growth resumes, at the same time that geologic and regulatory hurdles and lack of available capital limit a supply response."
"2009 coal demand will be impacted by the global pullback in steel production and moderate softness in global electricity generation, offset by growth from new generation and increased market share for coal.
“In response to current economic conditions, global coal production cuts have been accelerating, with more than 70 million tonnes of known thermal and metallurgical production reductions already announced.
"In thermal coal, 2009 global electricity demand will continue to be driven by China and India.
"China remains on track to be a limited net coal exporter, releasing just 26 million tonnes of initial coal export quotas for 2009, nearly 20% lower than the initial 2008 period.
“Global coal supplies are expected to be limited due to a combination of growing domestic needs for electricity generation, voluntary production cuts and supply limitations related to production challenges, and limited access to capital."
Peabody said it has 5 to 6 million tonnes of Australian-sourced seaborne thermal coal available to be priced for the last three quarters of 2009 and 10 to 11 million tons for 2010.
Metallurgical (Coking) Coal: The global recession and credit crisis led to a significant reduction in fourth quarter steel demand, which was matched by sharp cuts in steel production.
“This in turn is driving adjustments in seaborne met. Coal, with more than 30 million tonnes of announced production cuts so far, representing about 15% of total seaborne met. coal supply.
"The company expects met, coal demand growth to resume following steel producer destocking activities and a resumption of higher steel mill utilization rates. High-quality met. coal products are expected to remain in solid demand given their limited availability.
“Market dynamics will likely extend negotiations for annual contracts commencing April 1 into the second quarter of 2009.
"Peabody has 4 to 5 million tonnes of Australian-based metallurgical coal available to be priced for the last three quarters of 2009, reflecting as much as 2 million tons of production cuts due to expected softer demand, and 7 to 8 million tonnes available to be priced for 2010.
"While the world faces significant near-term economic challenges, Peabody’s middle- to long-term outlook remains positive.
“We believe that inventories will rebalance, steel demand will recover, new coal plants will come on line and existing plants will run at higher utilization, while difficult geology and lack of capital access will deplete supply and limit infrastructure development.
"As recent global outlooks have forecast, nations will continue to turn to coal in increasing quantities, and Peabody remains best positioned in the industry to serve this growing demand."
"Peabody’s full-year 2009 production volume is targeted at 190 to 195 million tonnes in the United States and 22 to 24 million tonnes in Australia.
"Total sales are expected to be in the range of 230 to 250 million tonnes. Volumes reflect the recently announced production cuts planned for Australian metallurgical coal and the Powder River Basin in the US.
"Globally we have tracked more than 70 million tonnes of production cuts for 2009, which have been announced or implied, along with major reductions in capital spending.
