Thermal over Coke

If Moody’s is correct, then natural gas is headed much higher after the shoulder season:

  • Switch From Coal-to-Gas Looks Permanent, Says Moody’s (CIN) and Most Coal-to-Gas Switching in U.S. Permanent, Moody’s Says (Bloomberg).

The price is still below the cost of production, but PBR coal is starting to recover (EIA).  Thus the strong coal company’s (CLD, ARLP, NRP) are trading higher.  Meanwhile, the leveraged and high cost names ANR and ACI trade like grim death and are real bankruptcy candidates.  The other cheapo name, JRCC, is trading better.

We are looking for a cyclical upswing in the US thermal coal in which to invest and speculate.  Many seem to be hanging their hat on steel-making coking coal.  My thoughts on why that is the wrong play:

  • First, if an investor wants to play coking coal the best investment is Teck Resources (TCK).  TCK’s coking coal is low cost production and superior quality.  TCK is my go to ‘industrialization of China’ play.
  • Steel is just one of many ways leverage robust Chinese growth.  This growth need to re-accelerate or coking coal will continue lower.
  • China steel glut may take nine months to clear at Platts.  Iron ore is down for the 12th straight day (Reuters).
  • No Quick Fix for Chinese Inventory Stockpiles at NY Times.
  • Slowdown May Be Worse Than Official Data Suggest at the Dallas Fed.
  • Shanghai Stock Exchange Composite:  Stockcharts.
  • “The implications of China’s slowdown” at the Economist.

Many speculators and commentators point to decent coking coal production in some of the US producers.  I have news:  If ANR bleeds cash in this market with coking coal over $200, any rebound in thermal will be offset by their coking sales.  Very bad for them.

Meanwhile, activity stateside is not too shabby.  Auto production chart and JD Power sales forecast.  Housing continues to be positive.