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Is it Good Time to Buy Coal Company Stocks

Date: 4/19/2012

Coal stocks dropped a lot in past six months. Here are several stocks:

Company Ticker 52 Week High Price Current Price Drop %
Arch Coal Inc ACI  $ 35.06  $9.94 72%
Alpha Natural Resources Inc ANR  $ 59.20  $16.82 72%
CONSOL Energy Inc CNX  $ 55.33  $34.44 38%
Peabody Energy Corp BTU  $ 68.30  $30.46 55%

This begs the questions: is it a good time to purchase coal producers’ stocks?

Demand of Coal

Coal Consumption in 2010 (Source US Energy Information Administration):

Usage Amount (million short ton) %
Power Generation 950 86%
Coke Plant 25 2%
Residential and Commercial 5 0%
Other Industrial 50 5%
Export 80 7%
Total 1110 100%

Reason for Low Coal Company Stock Price

Above tables shows that main users of coal are power plants. Newer power plants can switch from coal to natural gas. The reason for current low stock price is current decade low natural gas price. But why lower natural gas price affect coal price?

Today’s coal price is $103.55/ton (source: Daily price of Australian Thermal Coal). Australian thermal coal has heat energy value of 12,000 btu/pound. One metric ton of thermal coal can produce 26,455,200,000 BTU, which is 26,466 MBTU. That translates into $3.91/MBtu.

Today’s natural gas price is $1.87/mBTU (source: Natural Gas Price).

For same heat energy, coal is more than twice the price of natural gas. Adding transportation cost, storage cost, equipment cost, environment cost and potential regulation compliance cost, it is reasonable to assume that most power producers prefer natural gas. Most of new power plants being built will use natural gas as well.

What is the bottom for coal price

Coal price history in past 30 years shows that coal fetched between $25 to $40 per ton from 1983 to 2004. Then coal price jumped as high as $193 in 2008 (source: Daily price of Australian Thermal Coal in 30 years). It was a parabolic price jumped from 2006 to 2008, which was more than 300% jump. The price is on its way down to historical range.

For coal to come to same cost per British Thermal Unit (BTU) as natural gas, it needs to go to $50/ton. To attract power plant users, it should come down more. Probably to its historical range of $40/ton. That will put coal at $1.51/mBTU. If coal can go back to mid-point of its historical range at $30/ton, coal will be very attractive at $1.13/mBTU.

Another possibility is natural gas price increase. But natural gas price history shows that it stayed around $2/mBtu for most of time (source: Natural Gas Price History). Natural gas had similar price jump as coal. It just returned to its historical range.

Conclusion

Coal companies will suffer more pain before they recover. Better to consider their stocks when coal price reaches $40/Ton.

Disclosure: No Position on any Coal Companies and no plan to initiate position in 72 hours.

 

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