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Coal Can’t Dig Its Way Out

Slack demand and falling prices aren't about to reverse soon


According to StreetInsider Barclays (NYSE:BCS) analyst David Gagliano isn’t very bullish on the coal sector. In fact, it’s almost …. well bearish.

“Our channel checks in recent weeks have led us to conclude the metallurgical coal markets are in worse condition than most investors expect, with risk of yet another round of significant downward estimate revisions increasingly likely … To this end, while underlying prices have collapsed to ‘marginal cost’ levels, we maintain our view it is still too early to buy the coals in a meaningful way, until prices stabilize and until estimate revisions catch up with the ongoing rapid deterioration in the met coal markets.”

As the presidential candidates battle it out trying to outdo one another on how they’ll turn the U.S into an “energy independent” powerhouse regarding oil and gas, the coal industry ponders its own dark future, and investors wonder whether to bail on their stock holdings.

And it’s no wonder: While energy behemoths like Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.A, RDS.B) climb ever higher in both profits and stock appreciation, coal shares are sinking lower at every point on the charts.

Consider the percentage stock price losses among industry leaders Consol (NYSE:CNX), Alpha Natural Resources (NYSE:ANR), Peabody Energy (NYSE:BTU) and Arch Coal (NYSE:ACI), which InvestorPlace Editor Jeff Reeves picked as a buy in May, on the theory that Arch was oversold:

YTD 1-Year 5-Year
CNX (21%) (35%) (27%)
ANR (73%) (82%) (71%)
BTU (36%) (53%) (46%)
ACI (58%) (68%) (80%)

Not a pretty picture.

Avi Salzman in Barron’s penned a piece outlining some of the industry’s problems: lack of demand as users go to, in some cases, cheaper oil and natural gas. Power plants themselves have switched over to natural gas. Indeed, according to data from the U.S. Energy Information Administration, domestic output will decline by 81 million tons in 2012.

In addition, tougher regulations imposed by the Environmental Protection Agency are making life difficult for the industry.

It’s a tough one-two punch, particularly for coal producers that have exposure to what’s called metallurgical coal, the type used to make steel, which fits Peabody and Alpha to a tee. Slowing demand for steel in China and Europe exacerbates an already tough position.

It’s not going any more easily for Consol, which announced it will temporarily shut down its Buchanan mine in southwestern Virginia and a portion of its Amonate Mining Complex in southern West Virginia. The shutdowns are expected to last between 30 to 60 days.

And on the extreme end of the spectrum, Patriot Coal (PINK:PCXCQ) filed for bankruptcy protection in July.

On the plus side, the industry won a court battle against the EPA earlier this month, as a federal appeals court ruled against the agency’s cross-state air pollution rule. According to Marketwire, the court stated that the EPA had overstepped its authority and imposed “massive emissions reduction requirements” that were too strict. That’s at least one win for the beaten-down sector.

Make no mistake, however: Coal is still a critical industry. The EIA points out that coal accounts for 42% of all electricity generated in the U.S. Regulatory restraints are consistently under scrutiny and being challenged. And in states like West Virginia, which generates $63 billion in revenues and 63,000 jobs in the industry, coal is THE vital energy program.

But overall the news is not very good, and the wins will come only slowly if at all when it comes to regulations. So, I can’t find too much to make a case for jumping into the sector anytime soon, meaning in the foreseeable future.

The industry will survive, but my sense at this point is that Patriot won’t be the only canary that doesn’t survive. Investors should be very cautious if they want to mine this sector.

Marc Bastow is an assistant editor at As of this writing he’s long XOM.

Article printed from InvestorPlace Media,

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