3 Things to Watch With Arch Coal

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Arch Coal (NYSE: ACI  ) engages in the production and sale of thermal coal for use in electric utilities and metallurgical coal for the steel industry.

Today, let's look at three things investors should be watching regarding Arch Coal, as they will provide us better insight into the company.

1. Coal pricing and demand
Just call me Captain Obvious, but the first thing that investors eyeing Arch Coal should keep watch of is coal pricing and demand. Countless electric utilities are utilizing very low natural gas prices to make the pricey one-time switch to idle or convert coal-powered plants into natural-gas-powered plants. That reduced demand for coal has resulted in record backlogs and considerably lower prices.

Metallurgical coal is a bit of a toss-up. Prices for met coal used in steel haven't seen as great of a dip, but that hasn't saved it from falling due to weak manufacturing data out of China and a still-fragile construction market in the United States. Cliffs Natural Resources (NYSE: CLF  ) responded to this drop-off in met coal demand by selling its 45% stake in Sonoma Coal for $143 million earlier this year, while basically every other coal producer has drastically reduced EPS estimates, including Arch.

Let's be clear here, though: Arch Coal receives almost all of its revenue from thermal coal. The company's 2012 outlook calls for 128 million-134 million tons of thermal coal production versus just 7.5 million tons of met coal. Therefore, until natural gas prices rebound, or thermal coal prices stabilize, Arch Coal could find itself on shaky ground.

2. Follow its peers
With thermal coal demand remaining tepid at best, it pays to keep up on what Arch Coal and its competitors are doing to increase operating efficiency and lessen a record backlog.

Arch shut down four high-cost thermal mines in Appalachia while idling one more during its latest quarter in order to reduce output and reduce its costs. This is a trend we've noticed from multiple thermal coal producers including CONSOL Energy (NYSE: CNX  ) , which reduced its production and work days in order to cut costs, Alpha Natural Resources (NYSE: ANR  ) , which closed four mines in Kentucky and laid off 150 workers, and Walter Energy (NYSE: WLT  ) , which reduced output in some of its mines.

Also not helping matters was the bankruptcy of Patriot Coal. Under normal circumstances, you'd figure the bankruptcy of a peer would reduce output and hopefully boost pricing – but not in this case. Patriot is actually going to continue working through its bankruptcy proceedings meaning little relief for an already oversupplied coal sector.

3. Shipments to Asia
Even though the United States is still very much reliant on coal for energy generation, it's moving in the direction of cleaner fuels. Therefore, Arch Coal's best chance for future growth is to look overseas to Asia.

In 2011, U.S. exports of coal rose to 108 million tons from 84 tons in 2010, leading Arch to pursue as many international deals as it could muster. In the past two years it's signed two agreements to increase coal shipments to Asia from West Coast ports, while also striking a long-term agreement to ship coal out of the Gulf Coast. Arch's plans entail quadrupling its coal exports over the next decade, which seems relatively feasible given China's insatiable demand to industrialize.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Arch Coal's successes and pitfalls in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on Arch Coal, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that I'm sure you'll dig.

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