Are Investors Canaries in a Coal Mine?

Yesterday's brutal correction among coal and steel stocks blindsided investors just as strong supply/demand fundamentals and strategic acquisitions of coal assets were stoking interest in these sectors.

As Fools have come to expect based on prior observations of gold and silver, corrections within long-term secular bull markets can come very suddenly and strike surprisingly deeply. Without so much as a warning shot, coal equities shot downward Wednesday by double-digit percentages. Patriot Coal (NYSE: PCX  ) lost 15%. Alpha Natural Resources (NYSE: ANR  ) ? Off 17% since Tuesday's close. Even the Van Eck Market Vectors Coal ETF (NYSE: KOL  ) fell more than 10% on the day. The exchange-traded fund is finishing out the week down another 5% and beneath $50 per share.

Days like this highlight how crucial it is to maintain a Foolishly long-term view when investing according to guiding macroeconomic trends. Nothing changed overnight Tuesday to salve the global shortfall of coal, and no indications came to light regarding a revision of the expectations for growing demand for either coal or steel from emerging markets. Therefore, I continue to believe a long-term bull market for coal remains fully intact.

Coal companies were not yesterday's sole victims. Shares of steel producers were also hammered, even though cheaper coal would ostensibly bolster their margins. Schnitzer Steel (Nasdaq: SCHN  ) , which uses recycled metal to produce steel, gave up 17% despite having just beat analysts' expectations with its latest quarterly results. Mechel (NYSE: MTL  ) mines much of its own coal for some impressive vertical integration, but slid 13% yesterday anyway. ArcelorMittal (NYSE: MT  ) made headlines yet again when shares ceded more than 10% on the day.

While it may be tempting to assign all sorts of significance to various aspects of yesterday's sell-off, the Foolish bottom line is that a correction in coal was due after some unbelievable gains so far this year. Industry insiders have voiced expectations for supply deficits in coal lasting through 2010. I believe coal mining shares are likely to rebound fairly swiftly, and I think the long-term outlook both for coal and vertically integrated steelmakers remains as bright as a fireworks display.

Further Foolishness:

The "Coal" tag within the Motley Fool CAPS community lists 20 coal companies. Find out what others are saying about the stocks you're watching, or share your Foolish thoughts with us. CAPS is free and fun!

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns no shares in the companies mentioned. The Motley Fool has a disclosure policy.


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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 July 03, 2008, at 4:31 PM, Coalrules wrote:

    Fundamentals ARE at play. Market makers need activity to generate money for themselves. Today they did nicely.

  • Report this Comment On July 08, 2008, at 12:51 PM, Brettze wrote:

    Coal got to be this big because we had been shunning nuclear energy for past 30 years after the Three Mile Island meltdown . Coal can keep on growing bigger if we are not hell bent on growing alternate energy like windppower and solar and even conservatioin like turning off manually yourselves instead of leaving everything on automatically.. Conservation was supposed to be the fastest growing source of energy even though no energy is seen or used, quite the opposite. Conservation is simply demand cuts!!!! This is the easiest way out of our energy problems, yet we are not doing enough of that by far!! America seems to find nothing else to grow the economy besides keeping wasting energy and pouring in revenues from energy sources. This is not an excellent economic model to work on... if we start energy conservation much later and the energy prices will fall down only to end up watching energy consumers already fixed on long term contracts from coal suppliers act like dumb asses!! Any utility that rely on a lot of coal supplies are supposed to encourage its own ratepayers to start conserving energy so to improve its bargaining powers with coal suppliers. This year and next year will be the years when many utilities will need to renew contracts with coal suppliers drooling over higher prices . Is it smart or what? Well, well, I will be ...

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