Coal prices are getting a nice bump today after a long slide. Peabody Energy Corp. (NYSE: BTU), Arch Coal Inc. (NYSE: ACI), Alpha Natural Resources Inc. (NYSE: ANR), Patriot Coal Co. (NYSE: PCX), James River Coal Co. (NASDAQ: JRCC), and Cloud Peak Energy Inc. (NYSE: CLD) are all up between 3.5% and 9%.

Coal prices did not suddenly rise, but there is plenty of belief that they soon will. Analysts at FBR Capital Markets have said that the recent round of fuel-switching from coal to cheaper natural gas is about to end. According to The Wall Street Journal, about 90% of the switchable power generation capacity has already made the change. In order to maintain the high rate of fuel-switching, power plants that currently burn only coal would have to undergo major renovations that would take years — and billions of dollars — to complete.

The other driver appears to be rising demand for US exports of coal. Exports doubled last year to more than 100 million tons, about 10% of US production. But there are some constraints to increasing that number again. New terminals need to be built or existing ones expanded. That’s especially true on the West Coast, with its direct access to Asian markets, particularly China.

But it’s not clear that Chinese demand is going to rise. Reuters reported yesterday that China’s five largest utilities lost a total of $317 million in January as slower economic activity in the country depressed demand for electricity. And part of that problem was the price of coal, which averaged about $121/ton. Because the government controls the price that utilities are allowed to charge for electricity, rising coal prices wreak havoc on profits.

Couple that with today’s report from the International Monetary Fund that it is lowering its forecast for China’s GDP growth in 2012 from 8.4% to 8.2%. The Chinese have themselves forecast GDP growth of just 7.5% for 2012, down from 9.2% in 2011. That hardly seems like an indicator that coal demand will rise in the Middle Kingdom.

If US domestic coal prices rise, the rise is likely to be only moderate. The Central Appalachian coal price (called CAPP) is right around $2.50/million BTUs right now, about 20% higher than natural gas. Say it rises to around $4.50 or so, about where it was last year. At some point near there, converting a power plant to a switchable unit may become cost-competitive. A sure sign to look for will be an announcement from a major utility that it plans to make the switch. That could open the floodgates to new or remodeled gas-burning plants that will stop rising coal prices in their tracks.

And don’t count the US Environmental Protection Agency out of the mix either. The EPA has already proposed stricter emissions rules for new power plants and the rules nearly eliminate the possibility that another coal-fired power plant will ever be built in the US. Rules governing existing plants are still in progress, but these too could be very hard for coal-fired generators to comply with.

But hope rules today. Patriot Coal is up more than 8% at $6.23 in a 52-week range of $5.42-$2712.

Peabody is up about 7% at $29.20 in a 52-week range of $27.11-$68.30.

Arch Coal is up about 6.5% at $10.55 in a 52-week range of $9.88-35.06.

Alpha is up more than 8% at $15.83 in a 52-week range of $13.80-$59.20.

James River is up about 6% at $5.00 in a 52-week range of $4.51-$25.39.

Cloud Peak is up about 3.3% at $15.54 in a 52-week range of $14.65-$24.34.

Paul Ausick

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