How Bad are Coal Stocks? (JRCC, ACI, ANR, BTU, PCX, CNX)

Concerns about the global economic recovery and the ability of emerging markets, especially China, to keep growing are affecting prices for many commodities, including coal. Adding to coal’s problem is that US electricity generation plants that can switch from coal to natural gas are doing so because natural gas is now cheaper on a BTU basis than coal.

Coal miners James River Coal Corp. (NASDAQ: JRCC), Arch Coal Inc. (NYSE: ACI), Alpha Natural Resources Inc. (NYSE: ANR), Peabody Energy Co. (NYSE: BTU), Patriot Coal Corp. (NYSE: PCX), and Consol Energy Corp. (NYSE: CNX) are closing mines, cutting production, and in general struggling to keep revenues and profits from sinking.

Warm winter weather, historically low natural gas prices, and fears of an economic slowdown in China have pushed coal stocks down by between about -40% to -80% in the past year. Even coal miners that produce substantial amounts of the more costly metallurgical coal used for steel making have suffered.

Will the market for coal turn around? Certainly summer demand for air conditioning could help. If this summer in the US is, like winter, warmer than usual, demand for coal — and natural gas — will rise and prices along with it. But coal needs to close a gap of about $0.25/million BTUs before it is again equal to the price for natural gas.

Gas producers will help if planned production cuts materialize, but absent hotter weather that may not make enough of a difference. Coal provided the energy for about 42% of US electricity generation in 2011 and the US Energy Information Administration predicts a fall to around 40% in 2012. Natural gas-fired generation is expected to grow from 24.8% of generation in 2011 to 27.1% in 2012.

A hot summer combined with lower natural gas production will be the primary drivers for thermal coal prices in the US in the next six months. Investors wanting to bet on the weather can take a chance on coal, but an equally good bet would be on just about any agricultural commodity. Over the long haul, coal might make a comeback, but that’s betting that environmental issues can be overcome or pushed aside. The future for coal looks blacker all the time.

Paul Ausick