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Coal stocks (and by extension, their investors), have been battered and bruised to an extraordinary extent since before the 2008/2009 recession. While other sectors were also hit hard by that recession, for the most part they have recovered, as seen by stock market averages returning to the highs set back in 2007. But almost to a name, the damage in coal stocks remains. Will this sector ever return? Is there any reason at all to want to invest in these stocks?

I think the answer is finally yes. There are four broad catalysts which could bring some positive lift to the sector in the near term. They are a massive build of short positions; global economic stimulus; recently announced production curtailments and Mitt Romney's improving stature in the polls.

The Short Coal Trade is Overcrowded

Short interest in coal stocks is very high. A review of the major coal stocks shows the following percentages of their float sold short:

Arch Coal (ACI) 32.1%

Alpha Natural Resources (ANR) 22.1%

Peabody Energy (BTU) 10.5%

Consolex (CSX) 14.7%

James River Coal (JRCC) 26.0%

Walter Energy (WLT) 7.6%

These extraordinarily high levels of shares sold short become potential buys as at some point those shares need to cover and must be bought back in. Any potential rally in coal stocks therefore could have the potential for a significant move as short sellers rush to cover to avoid a potential squeeze.

Central Banks Across The Globe Are Adding Stimulus

During the third quarter, many industrialized nations announced various plans to stimulate their economies. The following is a brief synopsis of a few of those plans.

Japan, with a stagnating economy, a rising yen and weaker export markets, had its central bank expand a program that injects more cash into their financial system. The plan, which involves buying government bonds from lending institutions, will grow by an additional ¥10-trillion ($124-billion) to ¥80-trillion.

China, has announced 60 infrastructure projects worth more than $150 billion, as it looks to stimulate its economy, after suffering its worst slowdown in three years.

Europe, through the ECB has announced a sovereign bond buying program as well as negotiating direct aid to some of the financially weaker nations such as Greece and Spain.

In the USA, the Fed's recently announced QE Infinity, which will see that central bank make purchases of up to $40 billion in mortgage-backed securities every month, without any limit as to duration of the program, until employment reaches "acceptable" levels and housing markets show a sustained recovery.

Together these measures are intended to create a more robust global economy and if they succeed in achieving their goal, this should create increased worldwide demand for coal.

Significant Announcements of Production Curtailments

During Q3 there were significant announcements from a number of coal producers as to mine closures, layoffs and other measures that will lead to production curtailments. Among the companies announcing curtailed production was: Alpha Natural Resources announcement is probably the most significant as it plans to lay off 9% of its workforce while idling several mines. Recently bankrupted Patriot Coal (PCXCQ.OB) announced the curtailment of 85,000 tonnes per month of metallurgical coal. Peabody Energy permanently shut its Air Quality Mine in Vincennes, Indiana. Consol Energy announced the temporary closure of the Buchanan long wall met coal mine in Virginia.

Romney is Challenging Obama

President Obama has made it clear that his policies do not favor the coal industry. Under his presidency the EPA has taken measures that seek to provide a cleaner environment and in the process have reduced demand for coal. In the first Presidential Debate, Romney came out with a strong performance that put him in the running and created a close race. He explicitly stated that: "I like coal. I'm going to make sure we can continue to burn clean coal. People in the coal industry feel like it's getting crushed by your policies." This sent coal stocks on a rally, and one that appears that it will continue to have legs right up to the election as the Romney campaign continues with this rhetoric. A more supportive view of coal in Washington can go a long way toward improving sentiment toward coal shares.

Conclusion

The coal industry has suffered a major drubbing over the last four years. Many of the stocks mentioned in this article have witnessed declines of 80% or more. While structural problems remain, the news is not all bleak, and these four catalysts could spark a rally in Q4. Given how beaten down the sector is, any rally has potential to be significant in terms of size. Certainly risks remain in coal shares with inventories still high and thermal prices below most producers' costs. But these four catalysts offer up the prospect for a near term rally. Whether this is a rally for traders or investors, only time will tell.

Source: 4 Important Catalysts For The Coal Sector