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After underperformance of the U.S. coal stocks in 2012 compared with the broad market, I believe 2013 will be a better year for the U.S. coal industry. I am bullish on coal for 2013 due to an expected rise in natural gas prices, a projected increase in coal fired electricity generation, better coal inventory management and an increase in U.S. coal consumption.

2012 proved to be a tough year for the U.S. coal industry. The majority of the coal stocks lost a significant part of their market capitalization last year. Coal ETF (NYSEARCA:KOL) was down 22% in 2012, underperforming the broad market; SPY was up 13.5% in the same period. The table below shows performance of five coal stocks, KOL and SPY in 2012.

2012 Performance

CONSOL Energy Inc. (NYSE:CNX)

-12.5%

Arch Coal Inc. (NYSE:ACI)

-50%

Peabody Energy Corp. (NYSE:BTU)

-20%

Alpha Natural Resources, Inc. (NYSE:ANR)

-52%

Walter Energy, Inc. (NYSE:WLT)

-40%

KOL

-22%

SPY

13.5%

Source: Google Finance

Low natural gas prices, excess coal inventory and regulation concerns were the main reasons that led to depressed coal prices and a tough last year for the U.S. coal industry.

Natural gas prices bottomed in April last year to less than $2 mmBtu. For the full year, 2012, natural gas prices averaged $2.77 mmBtu. Lower natural gas prices led to a significant increase in natural gas fired electricity generation in 2012. In contrast, coal consumption by the U.S. power generators fell by 11% in 2012, to 829 million mmst, which was lowest in 20 years. The following graph shows the declining share of coal in the U.S. electricity generation for the last several years.

Graph 1:
(click to enlarge)
Source: eia.gov

Excess U.S. coal inventory was another major reason that led to lower coal prices in 2012. Total coal consumption was 895 mmst in 2012; which was the lowest in the last decade. The following two graphs show declining total coal consumption and rising U.S. coal stock.

Graph 2
(click to enlarge)
Source: www.eia.gov

Graph 3
(click to enlarge)
Source: eia.gov.

Despite the fact that the last year proved to be a challenging year for the coal industry, I believe 2013 would be a better year. This is because of the rising natural gas prices, expected increase in Chinese coal demand and better coal inventory management.

U.S. electricity generators consume a significant amount of coal, hence as natural gas prices will rise, coal consumption by the U.S. power generator will also go up giving support to coal prices. According to EIA projections, natural gas prices will rebound in 2013, which is why I believe coal consumption for electricity generation will increase. Also, the U.S. coal supply is improving as it was down 6.3% in 2012 and expected to drop further by 3.6% in 2013, which will reduce the U.S. coal stock and support coal prices. Moreover, coal prices will recover as demand for coal increases in global markets. China, which is among the leading coal consumers of the world, is expected to increase coal demand in 2013, according to RBC Capital. The following chart shows historical natural gas prices and projections for 2013 and 2014.

Graph 4
(click to enlarge)
Source: eia.gov

Record U.S. Coal exports in 2012
Lower U.S. coal consumption and coal prices gave a boost to U.S. coal exports in 2012; mainly to Europe. In 2012, the U.S. exported a record level of coal: 123.7 mmst. However, coal exports are expected to slowdown in the future as U.S. coal demand will strengthen and coal inventory levels will be reduced. EIA is projecting U.S. coal exports to be 108.2 and 113.8 mmst in 2013 and 2014. The following chart shows historical and projected coal exports for the U.S.

Graph 5
(click to enlarge)
Source: eia.gov

Conclusion
I believe coal stocks will perform well in 2013 compared with last year due to the reasons discussed above. Also, analysts are expecting earnings growth for coal stocks. The following table display analysts' earnings per share expectation for the five coal stocks.

EPS Est.
2013

EPS Est.
2014

EPS Est.
2015

5 years Expected Growth Rate/Annum

CNX

$1.16

$2.31

$2.88

12%

ACI

$-0.75

$-0.04

$1.1

5%

BTU

$1.11

$2.4

$4

-

ANR

$-2.16

$-1.37

$-0.9

5%

WLT

$0.74

$3.59

-

8.5%

Source: Nasdaq.com and Yahoo Finance

Source: I Am Bullish On Coal For 2013