(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Recent news out of China is signaling to the coal industry that leaner times are ahead.
"European demand is soft, and the economies of the developing world are slowing. But the main reason for slumping [coal] prices is China's softening demand growth," the NY Times' Clifford Krauss says, in what is a decidedly bearish article for U.S. coal producers.
While the article calls out coal as not having a bright future, there are two types of coal, thermal and coking. The average price of U.S. coal exports during the first quarter 2013 was $99.68 per short ton. According to the US Energy Information Administration, thermal coal exports totaled 13.7 million short tons (6.6% higher than fourth quarter 2012). I believe that when talking about the demand for coal, especially in China and Europe, the analysts and industry are referring to the thermal type which is used to power coal fired plants. In every article that talks about the demand for coal, they tie it back to the restrictions on coal fired plants, greenhouse gases, and looking for "greener" energy solutions.
In contrast, coking coal, is used for making steel and driving a large portion of the recovery in the dry bulk shipping sector. China is beginning to slow its economy, but also stocking up on cheap iron ore and coking coal. In contrast to the moderate growth in thermal coal exports, metallurgical coal exports totaled 18.2 million short tons (19.6% higher than fourth quarter 2012).
While the US has sought to establish energy independence, with a large portion coming from coal, they have tripled the export of coal and increased the dependence of the sector on these exports. With the waning demand from China and Europe, coal companies are making plans to scale back production. China may still have a demand for coke coal but the slowdown in thermal coal will still pull down the entire sector.
The Energy Information Administration released their recent projections for the short term US export of coal:
EIA estimates that first half 2013 exports totaled 61.3 MMst, which was 4.9 MMst lower than the same period last year. Exports for the next six months are expected to continue declining, with second-half exports totaling 54 MMst, down 6 MMst from last year. Exports are projected to total 109 MMst in 2014. Continuing economic weakness in Europe (the largest regional importer of U.S. coal), slowing Asian demand growth, increasing supply in other coal-exporting countries, and falling international coal prices are the primary reasons for the expected decline in U.S. coal exports.
With that in mind, I decided to see how the short interest has changed, and where the bears may be looking.
Alpha Natural Resources Incorporated (ANR) is one of the largest coal companies in the U.S., and also highly shorted (22%), but also highly traded with the equivalent of five days of volume being shorted. ANR recently set a new 52 week low, and seems to have rebounded somewhat. Since then short interest has fallen 7%.
Walter Energy Incorporated (WLT) produces both coke coal and thermal coal for export. While they have high percentage of the short float (almost 40%), they are highly liquid and based on the average daily volume, would return three days' worth of volume to the market.
James River Coal Company (JRCC) is a small cap that has struggled recently and may be facing bankruptcy, especially as the price of coal remains suppressed. They are shorted at about 26% of the float, but also highly traded with speculators and have a days to cover time of just over eight days.
In contrast, Westmoreland Coal Company (WLB) has a low short ratio (3%), but because of the low daily average volume, it would take over 22 days to cover the shorts. Any large amount of shorts attempting to cover would have a significant effect on price.
While each of these companies has different facts affecting the number of shorts and the direction of the moving average, the number of shorts in a stock can quickly tell investors how the market feels about the company. Coal as an industry will struggle in the future as exports lag, in spite of the need for metallurgic coal to make steel and fuel the global economy.