While the domestic coal industry continues to adjust to epic market disruptions within its customer base, a clear vision of the near-term outlook has remained the hottest commodity of all. This Fool continues to scan the horizon with some high-powered binoculars.
Carbons in context
Earlier in the year, I had to send my own canary into the coal mines just to glimpse the state of the sector. After the second quarter, a major chunk of uncertainty was wiped from our Foolish lenses as the miners found consensus in the view that market conditions had bottomed during the period. Massey Energy (NYSE: MEE ) turned in a massive earnings surprise, and Arch Coal (NYSE: ACI ) rounded out the chorus of bottom calls issued throughout the bellwether domestic industrial sectors.
As third-quarter results from major coal miners continue to cross the wires, this Fool's binoculars are beginning to achieve greater focus. Peabody Energy (NYSE: BTU ) provided ample evidence that the Asian coal market has decoupled significantly from its domestic counterparts, with railroad operator CSX (NYSE: CSX ) confirming the weakness that Peabody observed in U.S. thermal coal demand.
A bullish blurry spot
Into that crystallizing vision of the near-term domestic outlook, Appalachian miner Patriot Coal (NYSE: PCX ) this week threw something of a wrench into the mix by issuing a forecast for resumption of thermal coal demand that is decidedly more optimistic than the sentiments expressed by its peers.
Patriot CEO Richard Whiting declared: "We believe the (coal) markets are at an inflection point poised to see a substantial improvement in demand in 2010 in both metallurgical and thermal coal ... I am now more optimistic that the timeline is within our near-term sight." Whiting's outlook appears to be based largely upon the supply side of the equation, focusing upon anticipated impacts of increased regulatory scrutiny of Appalachian mining operations. Fools may recall my prior discussions of the changing political environment regarding surface mining permits.
Whiting also suggested that rising natural gas prices will end much of the fuel-switching that domestic utilities have resorted to this year, adding that this alone could account for 20 million to 40 million tons of resurgent coal demand in 2010.
Meanwhile, CONSOL Energy (NYSE: CNX ) CEO Brett Harvey views 2010 as "a bridge year to a tighter market." Noting the huge inventories piled up at the nation's utilities, Harvey added that "the overhang in thermal inventories is likely to continue into at least the first half of 2010." CONSOL missed earnings estimates for the third quarter by a whopping 27%.
Whether Fools focus in on Patriot Coal's optimism or CONSOL Energy's caution, it's clear that natural gas prices and Appalachian permitting remain key factors at play that coal investors must continue to track closely. What's your focus when building your outlook for the sector? Please share your thoughts in the comments section below.