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Have you heard the great news? All across the U.S.A., industrial bellwether companies are voicing a resounding consensus that business conditions hit a recognizable bottom during the second quarter.
Major coal miner Arch Coal (NYSE: ACI ) has added coal to that growing list of stabilizing sectors, adding an appropriately cautious tone about the world of difference between a stabilizing decline and the resumption of meaningful growth. Arch CEO Steven Leer conceded: "We are bouncing along at the bottom and not climbing out, but it's not getting any worse."
So far this earnings season, we've fielded declarations of a second-quarter bottoming phase from railroad operators like CSX (NYSE: CSX ) and Canadian National Railway (NYSE: CNI ) , and even from the carefully measured perspective of Nucor (NYSE: NUE ) CEO Dan DiMicco. Judging by the earnings results across most of these sectors, that bottom was forged not a moment too soon.
Following a 66% earnings decline from Peabody Energy (NYSE: BTU ) , archrival Arch Coal recorded a loss of $15.1 million for the quarter, as output cuts, increased production costs, and weak pricing sent revenue lower by 29% over the prior-year period. Perhaps more astonishing was a 20% reduction in coal volumes sold by a company that primarily produces thermal coal for use by power plants. Arch's own CEO, who forecasted only a 1% drop in demand for thermal coal for 2009 earlier this year, reported a deeper 4.2% decline in power generation year to date.
According to a coal mining equipment specialist Joy Global (Nasdaq: JOYG ) , reductions in thermal coal demand were supposed to correlate more or less directly with contraction in gross domestic product (GDP). The 20% drop-off in consolidated sales (including coking coal) that Arch Coal experienced connotes a meaningful break from that supposed correlation. Utilities, you see, are sitting upon large inventories of coal, creating more variable demand within any given quarter, but substitution of cheaper natural gas also appears to be gaining steam. Natural gas investors, are you paying attention?
The Foolish takeaway
There is much for coal investors to digest at this stage. Decoupling between Asian and U.S. coal demand has never been clearer, understanding the near-term outlook for U.S. thermal coal demand requires keeping track of natural gas prices and railroad statistics. Arch Coal boasts some impressive production capacity to grow into eventual strength, but this Fool continues to offer Peabody Energy and CONSOL Energy (NYSE: CNX ) as superior plays within this complicated sector.