Shares of Patriot Coal (PCX) hit a new 52-week high last week on rumors of a buyout from Massey Energy Company (MEE). Massey was mum on the subject, and a Patriot spokesperson would only say that the company didn’t comment on rumors. Patriot Coal was spun-off from Peabody Energy (BTU) in 2007.
There is, however, no denying a boomlet of sorts in the coal industry. Many analysts are saying that much higher demand for steel and expected demand increases for electricity are driving prices up for the metallurgical coal used in steel-making and the thermal coal used in generating power. The disastrous earthquakes in Haiti and Chile are also expected to boost the demand for structural steel.
The recent announcement that India’s Essar Group is buying a West Virginia coal company will only add fuel to the rumor mill. The WV company, Trinity Coal, holds about 200 million tons of coal, half of which is the more expensive metallurgical variety and half of which is thermal coal.
In a related coal-industry move, private equity firm Glencore International Group is exercising its option to acquire Colombia’s Prodeco (a thermal coal miner) from Swiss-based Xstrata Corporation for $2.25 billion.
A third positive signal from the coal miners is the announced contract between BHP Billiton (BHP) and a Japanese steel maker that both shortens the contract term for BHP to provide coking (metallurgical) coal to JFE Steel, and raises the contract price by 55%, to $200/ton, representing a discount of 5%-10% on the current spot price for coking coal. Typically, supply contracts have lasted either six months or one year, but BHP was able to negotiate a three-month contract that would be re-negotiated at the end of the contract period.
The shortened contract period could be the more important development, as supply contracts are still being negotiated between coal suppliers and ArcelorMittal (MT) and other Asian steel makers. BHP’s deal moves the industry away from a condition similar to the one that used to rule negotiations between unions and the US auto industry. The first contract set a benchmark for every other company to follow, and ignored spot price changes that often worked to the disadvantage of the miners.
This combination of factors will move coal prices up. A less important though still significant factor is the near certainty that the US Congress will not adopt any kind of carbon cap-and-trade bill this year. Because any sort of pollution pricing will hit US coal most heavily, the coal industry has a powerful argument against cap-and-trade or a straight pollution tax. Even the President comes from a state with a large coal industry and he has signaled his belief in clean coal technology.
As the leading global economies, including the US and Japan, recover from the recent recession, they will begin to compete with China, India, and other developing countries for a bigger share of the commodity pie. That leaves the coal industry in the position of considering more consolidation. Whether or not the Patriot/Massey deal is done, there are some other merger candidates that deserve their own rumors.
Besides BHP and Xstrata, Canada’s Teck Resources (TCK), Britain’s Rio Tinto (RTP), Arch Coal (ACI) and Peabody are large companies that could be looking for mergers or acquisitions to take advantage of the projected demand increase for coal.
Last year’s merger between Alpha Natural Resources (ANR) and Foundation Coal presents a bright outlook for companies that can find and finance the acquisition of metallurgical coal assets. This is especially true for coal that can reasonably easily reach the west coast and be put on a ship to Asia. Access to what the industry calls seaborne markets is a significant factor in the outlook for a coal miner.
The Powder River Basin in Wyoming and Montana is the hot spot right now because it is fairly close to the west coast. Peabody, Arch, Rio Tinto, and Alpha are the big players there. The coal mine assets of Black Hills Corp. (BKH), with a market cap of around $1 billion, could be in someone’s sights.
The Market Vectors Coal ETF (KOL) has moved up about 30% over the past 12 months, and tracks the share price increases in the coal sector very closely. A major holding of the ETF is Consol Energy (CNX), primarily a miner of thermal coal.
In 2009, coal stocks got back about half the value they lost in the second half of 2008, but they could still double again to reach their 2008 highs. Demand for steel from Asian steel makers will drive the coal market. Barring a second economic collapse, coal stocks are poised to continue the steady climb we’ve seen in 2009.
