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3 Things to Watch With Walter Energy

The coal industry has been in the market's doghouse this year, and Walter Energy (NYSE: WLT  ) has certainly suffered, despite its more industrial focus. The metallurgical-coal specialist has followed the broader sector into a deep hole in 2012:

WLT Total Return Price Chart

WLT Total Return Price data by YCharts.

Coal might be out of style, but that doesn't mean Walter Energy's down for the count. There are a few key things to watch that might indicate a turnaround. Let's take a look.

1. Will other steel materials suppliers (iron and coal) get more orders?
Companies have suffered across the steelmaking spectrum. Cliffs Natural Resources (NYSE: CLF  ) , which mines both iron ore and metallurgical coal, has fallen almost as much as Walter Energy in the past year, in part due to dwindling iron ore prices. Vale (NYSE: VALE  ) , an iron-focused miner, has performed better than either company, which seems to suggest that the coal side of steel production is currently the weakest:

WLT Total Return Price Chart

WLT Total Return Price data by YCharts.

Arch Coal (NYSE: ACI  ) , the weakest stock in this spectrum, is more focused on thermal coal, so our chart can give a rough approximation of the relative weakness of Walter's business. The most comparable company here is Cliffs, which may pre-signal a turnaround given its strength in both segments.

2. Will industrial steel demand grow again?
Walter Energy needs the steel industry to recover. In order for that to happen, heavy industry across the economic spectrum will need to regain its pre-recession highs. ArcelorMittal (NYSE: MT  ) and United States Steel are good proxies for steel rebounds, but you'll need to keep an eye on China as well. It's tough to know whether Chinese numbers are accurate or not, but steel production in the country is reportedly at all-time highs. The market doesn't appear to believe those reports, and since American metallurgical coal exports have dwindled over the past year, it isn't affecting Walter either way.

3. Where will input costs go?
Coal and iron ore have both been sliding in price since the start of 2011, and the Financial Times reports that coking coal prices are down by 23% since July. Things aren't quite as bad as they were in 2009, but further declines can't be ruled out. The only real positive in this picture is the fact that coking coal consumption hasn't crashed (say that five times fast), and was even on an upward trajectory at last tally:

US Coal Consumed by the Industrial Sector for Coke Plants Chart

U.S. Coal Consumed by the Industrial Sector for Coke Plants data by YCharts

Coal prices below recessionary lows would be devastating to Walter's bottom line. The only real defense the industry has against further declines is suspended production, but that'll only work if steelmakers don't continue to pare back their production as well. These prices are updated regularly, so a keen eye on commodities reports will help you stay ahead of potentially terrible quarterly results.

It might take some time for Walter Energy to rebound, but there are plenty of other growing stocks that you can buy today. The Fool's "Top Stock for 2012" can help you stay in the green while your long-term plan takes shape. Find out more about this buying opportunity by claiming your copy of our popular free report.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services have recommended buying shares of Walter Energy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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