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



Is This Coal Market Trend Strong Enough to Save Producers?

The U.S. coal market heated up in recent months, mainly due to harsh winter conditions and the rise in natural gas prices. As a result, will coal companies such as Peabody Energy  (NYSE: BTU  ) and Arch Coal  (NYSE: ACI  ) benefit from the growing demand for coal? Let's further explore the latest shifts in the coal market and see how they may affect coal companies.

Rise in production
This year's winter has pushed up the consumption of electricity; this is likely to further rally the demand for coal. The U.S. Energy Information Administration projects that coal consumption will increase by 5% in 2014 compared to 2013. Despite the expected rise in consumption, the price of coal isn't expected to rise this year. These developments suggest that while the coal output may recover, this won't pressure up the price of coal. In other words, some coal companies may see a rise in production, but this won't improve their profit margins.

Some coal companies don't even expect to increase their output. During the first quarter of 2014, Arch Coal recorded a 1.5% drop in its coal sales (in tons); moreover, the company's operating margin fell from a $0.37 per ton loss to $1.61 per ton loss. This fall is due to higher cash costs and lower average price sale.

Peabody Energy hasn't done much better. Even though its total sales (in tons) grew by 7% during the first quarter, year over year, its U.S. operating profit margin per ton declined by over 14%. This decline has more than offset the rise in tons of coal sold. As a result, the company's revenue dropped by 7%.

One of the reasons we haven't seen a staggering rise in coal production among coal companies is the high depletion rate from U.S. coal stockpiles. During the 2014 winter (between November 2013 and February 2014), coal stockpiles plummeted by 24% to their lowest level in eight years. In the following quarters, however, the stockpiles are likely to rise due to an expected rally in production. Will this benefit coal companies such as Arch Coal and Peabody Energy?

Arch Coal estimates its annual coal sold (in tons) will reach an average of 135 million tons, around 3.5% lower than in 2013. In order to compensate for the low price environment of coal, the company is trying to reduce its cash costs. Its updated 2014 guidance shows a lower cash cost in its Appalachia segment compared to 2013. This improvement will still keep this segment at an operating loss, however.

Conversely, Peabody Energy plans to increase its production but only by 1.5% to reach 255 million  tons. Moreover, the company has reduced its operating costs in the U.S. by nearly 4%. On a yearly scale, it plans to maintain a 2% lower cost per ton compared to last year. Considering the price of coal isn't expected to rally, though, this modest cost reduction isn't likely to improve this company's bottom line.

The coal market is likely to keep heating up in the coming months as production picks up. Some coal companies such as Peabody Energy will see a rise in production and may benefit from these recent developments, but other companies such as Arch Coal will not. In any case, the expected rise in production isn't likely to pull up the price of coal. Therefore, coal companies are likely to keep showing lower earnings and little to no growth in sales.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Read/Post Comments (1) | Recommend This Article (3)

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.

  • Report this Comment On May 31, 2014, at 1:31 PM, Paulson545 wrote:

    Feds: Arch Coal workers took $2M in kickbacks. How much lower will the coal stocks trade before the bloodletting ends ?...jmho

Add your comment.

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: 2970422, ~/Articles/ArticleHandler.aspx, 9/2/2015 7:01:48 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...

Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

Today's Market

updated 9 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

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

9/1/2015 4:00 PM
ACI $6.41 Down -2.90 -31.15%
Arch Coal, Inc. CAPS Rating: **
BTU $2.20 Down -0.50 -18.52%
Peabody Energy Cor… CAPS Rating: **