U.S coal companies have lost significant amount of their market value since the coal market peaked in spring of 2011. The downturn in the coal industry can be linked to the drop in natural gas prices and the economic slowdown in Europe. Conditions for the coal industry have remained hard, which has led to depressed prices for the coal stocks. The table below shows the market value lost for Coal ETF (NYSEARCA:KOL) and some of the leading coal companies of the U.S. since April 2011.
Peabody Energy (NYSE:BTU)
Walter Energy (NYSE:WLT)
Alpha Natural Resources (NYSE:ANR)
Arch Coal (NYSE:ACI)
James River (JRCC)
Market Value lost since April 2011
Source: google finance
As mentioned earlier, low natural gas prices is one contributor of coal's down turn. Lower natural gas prices triggered a "coal to gas switch" by the U.S. electricity generators, as they used cheaper natural gas for electricity generation, which led to a decrease in thermal coal demand. However, the fading met coal prices are likely to affect earnings of the U.S. coal producers in the 2H'13.
The benchmark price for coking coal dropped to $145/ MT, a decline of almost 16% quarter on quarter basis. The drop in the met coal price will not bode well for coal companies as earnings are already depressed for the industry. In the given situation of low met coal prices, production cuts become a critical factor that can help in price recovery in the near term. Analysts believe that in order to stabilize the struggling met coal market, significant production cuts by the coal miners are essential. Another factor that remains a threat to the met coal market is the drop in global steel production (excluding China) of 3.7% in 1Q'13 as compared to 1Q'12.
In the 1H'13, weak liquidity positions and balance sheets of the coal companies discouraged met coal producers from cutting production, as met coal operations were mainly generating cash to maintain their interest payments. But now moving in 2H'13 and given the drop in the met coal benchmark price, production cuts are necessary in the near term for the price recovery.
The U.S. coal companies that are highly leveraged to met coal operations are Walter Energy (WLT), Alpha Natural Resources (ANR) and Arch Coal (ACI). Earnings of these companies remain sensitive to conditions of the met coal market. Also, these three companies are likely to curtail their production further, as these companies have already cut their production since early 2012 when the met coal market began to weaken. I believe the upcoming 2Q'13 earnings releases of the U.S. coal companies are likely to include commentary on production cuts in efforts to price recovery.
U.S. coal industry has underperformed the broad market in the recent years, owing to ongoing difficult conditions in the industry. Recently, weak met coal prices have created pressures on the coal miners and have left production cuts as an important factor to support the struggling industry. The downturn in the industry has led to depressed stock prices and valuations for the coal companies. The table below shows the depressed valuations:
Source: Yahoo finance