Coal Thesis

In spite of the current depressed conditions, coal is here to stay (excellent read by Robert Bryce).  The thesis here at Independent Stock Analysis consists of a booming US thermal market when natural gas production finally declines meaningfully, perhaps later this year.  This cycle could be stronger for longer based on significant mine closures and coal with natural gas producers starved for capital.

ISA does not expect coking coal or emerging markets to contribute to the rebound until deep into the cycle.  Stock selection will be vital.  The winners and losers may not be the usual suspects and will not be identified if these fundamentals are ignored.

Low U.S. injections reflect already high natural gas storage inventories (EIA), but this is based upon price.  Time is needed for natural gas production supplied to turn lower.  Coal inventories remain high too.

When natural gas production falls, coal demand will return.  And when this occurs the cycle could be robust.  Coal producers have idled mines, many which will not return because of regulation.  Other mines will not be quickly reopened, having seen equipment sent to other mines to save the cash strapped companies capex spending.  “U.S. year-to-date coal production totaled 601.8 mmst, 5.5 percent lower than the comparable year-to-date coal production in 2011” EIA.

Coal is harassed by greens and governments in the rich OECD countries (Coal Zoom), which is why we giggle at Obama, Romney battle for pro-coal mantle (The Hill).  Yet emerging nations are not about to stop building coal plants (Platts).

India is currently low on coal, as “Coal India agreed on Tuesday to pay penalties for failing to provide sufficient supplies to new Indian power projects…” (First Post).  Though China’s current inventory level is high, long term they will still be largest source of growth (Nasdaq).

“Between 2000 and 2010, the global consumption of coal increased by around 2.3-billion tons, or 50%, and is expected to expand by another 25%, or 1.7-billion tons, in the next decade.”  Mining Weekly

Long term, even Africa may be bullish for Coal.  Engineering News.  Simply said, they are short of energy (Trefis).

With “A significant decline in China’s second-half steel output is a foregone conclusion,” Xue Heping,” do not expect coking coal to save certain names in the sector.  (WSJ, sub required)

Though the coal sector was the market star yesterday (Street Insider), a thorny shoulder season could be in ahead.  Powder River Basin coal should rebound first followed by the Illinois Basin.  Appalachia will recover last and see its market share shrink (EIA).  The Coking coal trough is still in the distance.

Click here for the Independent Stock Analyst ongoing coal commentary.

Click here for the ISA homepage.