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Peering Through Coal's Hazy Present Into the Future

Over the last 52-weeks, coal miners had their share of ups and downs... mostly downs. A key determinant in this bumpy ride has been the price of natural gas, both in the United States and abroad. A wide divergence between domestic and international pricing equated to a meaningful drop in U.S. demand in concert with plummeting gas prices. Thankfully, Europe and Asia came to the rescue, due to the fact that natural gas prices remained uneconomically high when compared to coal prices.

While the U.S. exported a record amount of coal in 2012, and entertains visions of continued strength in this market, the domestic picture remained murky. Utilizing the headlamps of Peabody Energy (NASDAQOTH: BTUUQ  ) , we might be able to glean an idea of what the future holds for it and its direct competition.

What does the canary have to say?
The forecast supply and demand dynamic is a critical component in determining future strategy for nearly every industry, especially for capital-intensive industries such as mining. 2012 was a time for coal producers to take a step back, along with a deep breath, and analyze their production plans scrupulously. The vast majority of producers trimmed current production, and hints at future plans have been delivered in the form of slashed capital expenditure budgets. CONSOL Energy  (NYSE: CNX  ) , for one, only expects around a third of its 2013 investment budget to be allocated to coal, whereas natural gas will be seeing a significant uptick in attention. Comparatively, CONSOL's high-water mark of its expected range comes in at just $520 million for coal, versus $935 million for gas.

Given planned supply reductions such as those at CONSOL, expectations for increased demand worldwide are likely to help revive some of the lower pricing we have seen in both the metallurgical and thermal coal markets. According to Peabody management, it expects global demand for thermal coal to increase 40 million tons over 2012 levels, and a suspected 75 gigawatts of coal-fired power generation will be coming online that would require an additional 250 million tons at peak capacity. And that boost doesn't even touch the metallurgical coal market which could ride steels coat tails to a higher finish in 2013.

And now for the long term...
Now, this next section should be taken with a lump of coal, but industry soothsayers are certainly expecting continued growth in coal demand, even beyond what I would consider to be the foreseeable future. For example, BP (NYSE: BP  )   announced in its "World Energy Outlook" that coal use in power generation should grow by 26% by 2030. Trailing only renewable sources, coal trumps both oil and gas. Because this growth is based on global demand, companies with the network and experience with exportation will likely enjoy the bulk of the income statement fattening. 

In its just-released, fourth-quarter and full-year earnings release, Arch Coal (NASDAQOTH: ACIIQ  ) had some positive remarks on certain recent undercurrents it has been witnessing in the coal market. For one, it expects power producers to increase coal demand by up to 50 million tons due to increasing natural gas prices. These higher prices make western U.S. coal more competitive. Along with higher demand in the U.S., Arch foresees continued strength in the export markets to China, Europe, and India. While the reasons for each country's demand is different, Arch Coal believes the shipments it witnessed in 2012 to these locales should continue to roll through 2013. 

If you are in search of more clarity around expectations, Alpha Natural Resources (NASDAQOTH: ANRZQ  ) is scheduled to release its 2012 earnings on Feb. 14. Although, Alpha Natural is more reliant on eastern U.S. coal production than Peabody and Arch Coal, so it isn't quite the overall market bellwether that they are.

Is your investment canary chirping?
With investor sentiment still down on coal companies, it could be the perfect time to take a look at a few producers in this sector for investing purposes. If notions of a trough in prices and hopes for a shrinking imbalance in supply and demand from key players manifest themselves, coal companies might not be this cheap for a while. As always, perform your own personal due diligence and soul searching prior to pulling the trigger. Fool on.

The coal industry in the United States has been in a state of flux since the arrival of a cheaper alternative for energy production: natural gas. Exports are becoming a much bigger part of the domestic coal landscape, and Peabody Energy has deals in place to get its cheaper coal from the Powder River and Illinois Basins to India, China, and the EU. For investors looking to capitalize on a rebound in the U.S. coal market, The Motley Fool has authored a special new premium report detailing exactly why Peabody Energy is perhaps most worthy of your consideration. Don't miss out on this invaluable resource -- simply click here now to claim your copy today.

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