Coal Producers Struggle With Price Dips

 | Apr 05, 2013 | 10:00 AM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:






The standard stock market advice is "Never try to catch a falling knife."  I'd add "especially if it's made of tons of coal."

I know shares of coal producers look like tempting bargains right now. Shares of Peabody Energy (BTU) are down 29.6% in the last 12 months -- and that's one of the sector's best performing stocks. Shares of Arch Coal (ACI) are down 49.7% in the last 12 months; shares of Alpha Natural Resources (ANR) are down 50.2%; and shares of Australia's Whitehaven Coal are down 63%. But I don't think we've seen a bottom yet in the sector. The deal between Australian coal producers and Japanese consumers of thermal coal (the kind burned in power plants) serves as a benchmark for coal. Those negotiations set the price at $115.20 per metric ton in 2012-2013. (That's below the record high of $129.85 a ton set in 2011-2012.) This year negotiations are pointing to a benchmark price that might be as low as $94 a delivered metric ton.

The reason for the price moves is that Japanese utilities, under pressure from the Japanese government to reduce soaring electricity prices in the wake of the shutdown of most of Japan's nuclear power plants,  are aggressively trying to drive down prices. (Australian producers are hoping for something north of $100 a ton.)

At current Australian port prices of $90 a ton about 25% of Australia's coal miners are losing money, commodity trader Glencore estimates. In a normal market that would be expected to take some miners, or at least some capacity,  out of the sector, which would push prices higher.

But that might well not be enough to reduce supply. Coal producers with long-term contracts may chose to operate at a loss and, since money is cheap right now, simply borrow to make up the difference. (Once you've broken a delivery contract, it can be tough to re-enter the market.) It might take a drop to $72 to $74 a ton (Australian port price) to lead to a significant reduction in supply, Deutsche Bank estimates.

If that's the price it takes to bring about the reduction in supply that's needed to stabilize prices, then I think investors are looking at 2014 before the knife stops falling.

We've seen the first important indication that supply will start coming down. Coal producers have slashed their capital spending budgets for 2013. Peabody Energy, for example, has cut its capital budget for 2013 by 50% from 2012 levels. Strange how falling sales -- and Peabody saw a 14% drop in tons delivered in the fourth quarter of 2013 from the fourth quarter of 2012 -- can make spending money on new capacity less of a priority.

The next key indicator for the sector could be significant asset sales by cash-strapped coal producers, especially in Australia where costs are projected to increase another 10% in 2013. My best guess now is that when that starts to happen Peabody will be a big buyer, especially of Australian assets. Australian mines are much closer to the important China and India end markets than U.S. mines are. Peabody was adding Australian coal assets before the correction in thermal coal prices and I'd look for the company to use its financial heft to stockpile assets in Australia for the turn in the cycle next year. At the end of 2013 or so, I'd be thinking about adding Peabody to a portfolio.

Columnist Conversations

Foot Locker's (FL) less than expected quarterly earnings set off a round of selling the entire athletic appare...
View Chart »  View in New Window » Gold has met the first upside target off the last setup zon...
View Chart »  View in New Window »
View Chart »  View in New Window »



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.