Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



4 Companies Dominating Coal

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The Energy Information Administration recently noted that Peabody Energy (NASDAQOTH: BTUUQ  ) , Arch Coal (NASDAQOTH: ACIIQ  ) , Alpha Natural Resources (NASDAQOTH: ANRZQ  ) , and Cloud Peak (NYSE: CLD  ) supply half of this country's thermal coal. The other 50% of the market is divided between 500 players. That leaves plenty of room for bankruptcies, closures, buyouts, and mergers to underpin a coal industry rebound.

Peabody is a global coal giant. About half of its business is domestic thermal coal. It has notable operations in the Powder River (PRB) and Illinois (ILB) coal basins. These are the two cheapest coal regions in the country, with the ILB actually gaining share from other regions in recent years, a trend that's supported continued growth at relative small fry, but ILB-focused, Alliance Resource Partners (NASDAQ: ARLP  ) .

Both Arch and Alpha have exposure to these two basins, but also produce metallurgical coal from domestic mines. That's been a drag of late, as Alpha noted in its second quarter report: "the global seaborne market for metallurgical coal deteriorated further due to increasing supply out of Australia together with the expectation of slowing Chinese steel production growth and the ongoing economic malaise in Europe and Brazil."

This is a trend that's hurt met coal prices and squeezed this duo's margins. Interestingly, about 60% of Peabody's Australian business is met coal. So, it's benefiting abroad at the expense of its U.S. competitors, one of the positive attributes of its global footprint. Still, the big issue remains the weak U.S. thermal market, into which this trio, plus PRB-focused Cloud Peak, are the dominant suppliers.

Getting smaller
Companies are pulling back throughout the U.S. thermal industry to deal with the weak market. This quartet is no stranger to the trend, with all highlighting efforts to curtail capital spending this year. That's included mine closures and a reduction in growth spending. Cloud Peak, which is the only one of the group that has remained profitable through the downturn, has even begun discussing shuttering some of its production in 2015 if demand demand doesn't pick up.

Many of the other 500 companies serving the market, however, haven't been as fortunate, falling into bankruptcy or simply closing up shop. That includes the high-profile Patriot Coal bankruptcy as well as lesser known names like Trinity Coal.

And that's the opportunity. It means that the industry's pullback is removing supply and competition from the ranks of the lesser players. The big fish will end up with an increasingly larger slice of the pie. And, when times get better or at least stabilize, the largest players can grow their businesses again by simply increasing production to pick up share from players that have dropped out.

Getting bigger
There's nothing new about this in the coal industry. In fact, the top players only controlled about 25% of the U.S. thermal market twenty years ago. So as market conditions improve not only will Peabody, Arch, Alpha, and Cloud Peak look to increase production, but they might also seek out some acquisition candidates. The problem they face right now is that by controlling so much of the market, they pretty much have to lead the supply correction.

That said, don't overlook smaller players. Alliance Natural Resources is a prime example, despite the weak coal market overall, it has used its well positioned ILB portfolio to gain market share from coal miners in less desirable locations. Internal growth projects and acquisitions have driven twelve consecutive years of record results. Alliance has no plans to change tactics and expects 2013 to add to its string of records.

The big four will likely play copycat once the coal market strengthens. And being a part of this elite group positions Peabody, Arch, Alpha, and Cloud Peak well to shift back to growth mode when the market improves.

More from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2673994, ~/Articles/ArticleHandler.aspx, 9/28/2016 8:00:29 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 10 hours ago Sponsored by:
DOW 18,228.30 133.47 0.74%
S&P 500 2,159.93 13.83 0.64%
NASD 5,305.71 48.22 0.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 3:58 PM
ACIIQ $0.43 Down -0.02 -3.41%
Arch Coal, Inc. CAPS Rating: *
ANRZQ $0.00 Down +0.00 +0.00%
Alpha Natural Reso… CAPS Rating: *
ARLP $21.64 Up +0.10 +0.46%
Alliance Resource… CAPS Rating: ***
BTUUQ $1.54 Down -0.06 -3.75%
Peabody Energy Cor… CAPS Rating: *
CLD $4.30 Down -0.21 -4.66%
Cloud Peak Energy CAPS Rating: **