The U.S. coal industry has been going through a rough patch as of late due to lower natural gas prices, an economic slowdown and tougher environmental regulations that discourage coal consumption. However, I believe the worst has been priced in, and U.S. coal stocks have bottomed out; therefore, I reiterate my bullish stance on U.S. coal stocks. The following table shows the price performance of four U.S. coal stocks and the coal ETF (KOL).
Price Performance YTD
Peabody Energy (BTU)
Arch Coal (ACI)
Alpha Natural Resources (ANR)
Walter Energy (WLT)
Source: Google Finance
The soft coal demand, due to a slowdown in key world economies and strict environmental regulations, led to oversupplied coal markets, which resulted in weak coal prices. Coal companies are cutting their coal production to address the issue of oversupplied coal markets. Also, as economies around the globe, including China, Europe and the U.S., are displaying signs of an economic recovery, this will strengthen coal demand in future and portend well for the coal industry. Also, a rise in natural gas prices will benefit the coal industry and result in higher coal demand, as coal-fired electricity generation will increase.
The soft coal demand resulted in excess coal supply in markets. I believe the coal industry's rebound hinges on production cuts and better coal supply management. ACI and ANR are among the leading U.S. coal companies that have announced production cuts. However, I still believe coal companies need to accelerate their production cuts and idle more coal mines in response to soft coal demand and prices.
According to the recent quarterly coal report published earlier this month by the Energy Information Administration [EIA], U.S. coal production for the second quarter of 2013 totaled 243.1mmst, 0.8% lower than the first quarter of 2013, and 0.8% more than the second quarter of 2012. For a continuous and sustainable recovery in coal demand and prices, the industry needs to curtail its supply to remove excess supply from markets. The following chart shows the U.S. quarterly coal production.
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U.S. Coal Export and Imports
Coal exports consume a notable chunk of U.S. coal production and are a key catalyst for the coal industry. U.S. coal exports have increased from almost 13mmst since the second quarter of 2009 to almost 30mmst in the second quarter of 2013. On the other hand, coal imports for the U.S. have decreased from 5mmst in the second quarter of 2009 to 2.75mmst in the second quarter of 2013. According to EIA estimates, U.S. coal exports totaled 29.3mmst in the second quarter of 2013, surpassing the 5-year (2008-2009) second-quarter average. U.S. coal exports, according to EIA estimates, are likely to total 112.3mmst and 105.5mmst in 2013, and 2014, respectively. As economic conditions in the eurozone have been improving, I believe U.S. coal exporters might surpass EIA coal export estimates for 2013 and 2014. The following graph shows U.S. coal export and import trends for recent years.
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In recent years, due to lower natural gas prices, electricity generators used more natural gas for electricity generation instead of coal. Natural gas prices dropped below $2 in the second quarter of 2012, which made using natural gas more cost competitive in comparison to coal. However, natural gas prices have bottomed out, and the EIA expects natural gas prices to rise to almost $4 mmBtu, which will increase coal-fired electricity generation and coal demand. Coal-fired electricity generation is expected to increase by 6.1% year-on-year in 2013. The following graph shows future natural price estimates by the EIA.
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I believe U.S. coal stocks have bottomed out. Better coal supply management, healthy U.S. coal exports and an expected rise in natural gas prices bode well for the coal industry, and are among the leading reasons that make me bullish. Also, coal stocks are trading at depressed valuations, which makes them attractive investment opportunities for long-term investors. As coal markets will strengthen in the future, we will see multiples expansion for U.S. coal stocks. Due to the aforementioned factors, I reiterate my bullish stance on the coal industry.
Source: Yahoo Finance