Coal Stocks Down this Week, Here's Why
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Coal stocks are trading down again this week. Here's why. As of Friday morning, prompt natural gas prices are down to $2.70 per MCF. This is disappointing as the price was above $3 for much of the past month. Natural gas prices are important because as gas prices fall, power plants switch from coal to natural gas to generate electricity.
| Price on | 2012 | 2011 | % Down | % Up | ||
| 8/16/2012 | Yield | Lo | Hi | From Hi | From Lo | |
| ACI | 7.00 | 1.71% | 5.16 | 36.04 | - 81% | 36% |
| ANR | 6.60 | 5.75 | 67.38 | - 90% | 15% | |
| ARLP | 65.79 | 6.46% | 49.40 | 83.25 | - 21% | 33% |
| BTU | 22.41 | 1.52% | 18.69 | 72.63 | - 69% | 20% |
| CLD | 17.95 | 13.65 | 24.34 | - 26% | 32% | |
| CNX | 32.20 | 1.55% | 26.42 | 55.49 | - 42% | 22% |
| JRCC | 2.59 | 1.68 | 26.84 | - 90% | 54% | |
| WLT | 36.99 | 1.35% | 31.37 | 141.17 | - 74% | 18% |
| -62% | 29% |
Strike activity in Colombia has been largely resolved. First truck drivers voted to go back to work, and then the strike itself was ruled illegal. International coal prices had gone up a few dollars per tonne on this labor action, only to give back the gains this week. Colombia is the 4th largest exporter of thermal coal, mostly to Europe.
After appearing to have stabilized last week, premium hard coking coal prices continue to move lower. Investors are looking for a bottom before gaining the conviction to jump back into the coal stocks. Benchmark low-vol premium hard coking coal is reported to be trading at $170 per metric tonne. This compares to $330 per tonne a year ago.
Chinese thermal coal demand shows no sign of improving, and China's headed into a slack demand period between summer and winter. Also, China' hydroelectric generation is well above last year. According to a recent Bernstein research report, thermal coal prices may not rebound by much because domestic supply is up a lot this year, a factor that some market participants may be missing.
From a UBS report on China's coal situation, dated August 15th, quote,
"We do not see any signs of coal prices rebounding significantly in 2012, due to weak demand. As the coal producers are facing pressure to maintain market share and manage cash flow, we expect coal prices to decline again after the summer peak season. We believe the coking coal price will face more downside than thermal coal."
And, from a Reuters news update, quote,
"There are bearish reports that (metallurgical) coal prices are going to be weak," said analyst Lucas Pipes, of Brean Murray Carret & Co. Metallurgical, or coking coal, is used by steelmakers. The industry newsletter Inside Coal said suppliers were preparing for the quarterly global benchmark price - agreed between major Asian steelmakers and coal suppliers - to settle at around $185 per tonne, below the previous level of $225."
High beta coal stocks like Alpha Natural Resources, (NYSE: ANR), James River, (NASDAQ: JRCC) are down the most. Alpha is down because it needs coking coal prices to rebound by 2013 to maintain free cash flow break even. James River has an ample cash balance, but if the present coal market downturn continues well into next year, James River will have trouble contracting coal for 2014 at prices that cover their operating costs.
Walter Energy, (NYSE: WLT) bucked the downward trend, up on speculation that Xstrata might be preparing a $47.50 per share take out bid, (subsequently denied on both sides) for the company. I've said that I think Walter is a prime target, but I think an attempt at a price below $60 per share is unlikely.
Natural Resource Partners, (NYSE: NRP) was among the top losers by mid-week because it filed to issue up to $500 million of new units and announced that a significant unit holder is looking to sell a large block. By Friday, NRP units were back in-line with the group. NRP does not operate any coal mines. It leases mineral resources to producers. In addition to coal, NRP leases aggregates used in road, bridge and housing construction and oil & gas properties.
As can be seen in the chart, on average, coals stocks are 29% above 2012 lows. This might give short sellers courage to sell into continued bad news. Coal prices are currently moving lower at a more modest pace. Last month coal prices moved aggressively lower.
For a timely update on some GOOD news in the coal space, see this.
MockingJay2011 owns shares of Alpha Natural Resources, Walter Industries, and Natural Resource Partners LP. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
