It's not just iron ore that's plunging in China in the last month. Metallurgical coal followed the same script for the same reason - weakness in China's steel sector. Met coal dropped in excess of 20% since June, same as iron ore.
This has severe implications for Alpha Natural Resources (ANR) because a large part of its revenues comes precisely from met coal. In the most recent quarter, 45.7% of ANR's coal revenues came from met coal.
The bet on a cyclical upturn for coal (KOL) depends, at the very least, on being able to see the light at the end of the tunnel. It depends on projections going forward being better than what came before, even if losses are still predicted. With metallurgical coal plunging in price and thermal coal being held in place by still excessive natural gas production, such perspective, which existed up until a few weeks ago, is now gone.
The lack of near term improvement means the bottom in the coal sector, especially for companies dependent on met coal sales, can be found significantly lower. The debt loads on these companies, made large by ill-advised acquisitions at a previous market top, carry with them the risk, or at least the fear, of bankruptcy. Such fear can bring about significantly depressed stock prices.
Although I was referring to ANR, this same logic also applies to Peabody Energy (BTU), which also has significant exposure to met coal exports from its Australian operations.
Barring some significant intervention by central banks (Federal Reserve, European Central Bank), I believe the most likely path for the affected stocks will be down, and even if a trader/investor wants to bet on a cyclical bottom, better prices will be available in the future as this pricing collapse filters through the markets and estimates.
There is no near-term catalyst to turn around met coal or iron ore in China. The weakness in construction is still filtering through to steel and although housing starts have been plunging fast, they still have room to fall further. Also, undergoing construction has a lag to starts (because buildings take time to complete). The entire dynamic does not exhaust itself in just a few months, so it's likely that companies exposed to met coal will trade even weaker in the weeks and months ahead.