Investors Stoked About Coal

Indulge me for a moment, and imagine the following scenario. Three months ago, you modified a dartboard by replacing each number on the board with the ticker of a publicly traded coal producer. You -- no, even better, a monkey -- threw a dart, and you bought the indicated stock. Well, congratulations, weirdo: you're probably sitting on a double-digit gain.

Most people don't choose stocks in this manner, although a Chicago daily owned by Sun-Times Media Group (NYSE: SVN  ) does have a stock-picking monkey on staff. Sometimes, though, a rising tide lifts all boats in a particular industry. I wouldn't say the coal group is experiencing the perfect storm, but there are disparate factors making monkeys out of short-term naysayers.

Waiting for winter
An unseasonably warm winter had been contributing to depressed natural gas prices, due to lower heating demand. We got ourselves a little wintry blast in the latter half on January, and natural gas futures leapt 9% in a single day.

Coal is a substitute for natural gas in industrial power generation, so their prices tend to move in tandem. Spot coal prices began inching up around the time of the cold snap, albeit less dramatically. Then in February, a blizzard disrupted the supply from the Powder River Basin in Wyoming, prompting future price uncertainty.

Disciplined production
This is a nice euphemism for the effective coordination of lower industrywide output. By the end of 2006, utilities had built up coal inventories of 48 days of supply. To put that in some context, 10 days' supply is considered a critical threshold, and inventories stood at around 34 days of supply in 2005. Anything above 40, and utilities aren't really thinking about buying more coal.

In mid-February, the miners achieved a pretty impressive week-over-week reduction in output of 3%. Time will tell if they can continue to resist breaking rank and going for some fast money if prices firm up a bit.

We strike! No, actually, you're fired
One of the country's largest domestic producers, Foundation Coal (NYSE: FCL  ) , had a difficult situation on its hands when threats of a strike arose at three of its operating affiliates' mines. Or, one could also say it was relieved of a difficult situation at the same time -- the strike seems to have emboldened the company to flat-out close Wabash, a money-losing Illinois mine, in response to the imminent work stoppage.

Nine-hundred workers from the other two mines, which are highly profitable, remained on strike at the time of this writing. These miners have significant bargaining power, and drawn-out negotiations will take a small but meaningful amount of supply off the market.

Attention, distress buyers
Last but not least, there is plenty of chatter about M&A in the industry, due in no small part to the likely bankruptcy of various players in the high-cost Eastern and Midwestern coal fields. Arch Coal (NYSE: ACI  ) and Massey (NYSE: MEE  ) have both indicated that they will be looking to pick up assets, and you can bet that Wilbur Ross, the distress investor at the helm of International Coal Group (NYSE: ICO  ) , will have his eyes peeled for bargains as well.

Fool contributor Toby Shute welcomes your feedback. He does not own stocks in any companies mentioned in this article, but will gladly take on any monkey in a stock-picking contest. The Fool's disclosure policy gets him all fired up.


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