Is coal a dirty word again? If you look at the coal sector's performance yesterday -- from the price of coal, to the coal companies themselves, and even to miners in general -- anyone associated with the industry got covered in soot.
The Dow Jones U.S. Coal Index tumbled 14% yesterday, leaving investors who hold coal stocks perhaps feeling like canaries in a coal mine -- wondering whether they should take flight.
Mammoth Peabody Energy (NYSE: BTU) fell 9%. Fording Canadian Coal (NYSE: FDG) -- which has a majority stake in the world's second-largest exporter of metallurgical coal, Elk Valley Coal partnership -- saw its shares decline by 16% yesterday. Walter Industries (NYSE: WLT), which had been trading near its record highs of $110 a share, plummeted 19%, making it one of the worst-performing stocks in the market.
The factors that have driven coal prices up, though, haven't changed. With oil prices hitting new highs seemingly every day -- Hey! How about a correction in oil for once? -- demand for cheaper alternatives are being sought, and low-grade thermal coal is one answer. Moreover, demand remains high for metallurgical (or coking) coal, which is used in the production of aluminum and steel. With the economies of China and India reliant on both kinds to fuel their growth, there's little doubt that coal, like oil, will remain dearly priced -- even after this correction.
Coal is responsible for 40% of the world's energy needs, while places like India rely upon coal for nearly 70% of their energy supply. China counts on coal for 78% of its supply, and the country accounts for one-quarter of the world's coal consumption. Natural and manmade influences have also affected supply.
South Africa's power grid outages earlier this year, coupled with floods there, in Australia, and even here in the Midwest, have served to reduce supplies. Meanwhile, the Chinese government is forcing miners like Yanzhou Coal Mining (NYSE: YZC) to increase production but lower prices.
While Arch Coal (NYSE: ACI) was one of those coal stocks dropping yesterday, down some 17%, the long-term prognosis for these companies looks promising. While they might slide some more in the short term, the chopping that Arch, Walter, and Massey Energy (NYSE: MEE) took yesterday should be viewed as an opportunity to get in on these strong companies that have suddenly become a lot cheaper.
Major demographic trends point to coal's continued ascendancy. It might pay off to dig in with both hands and get your fingernails dirty.
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