Coal Producers Tired Out

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In the past year, we've had companies attribute unhappy results to everything from bad weather to high gas prices. But Fording Canadian Coal Trust (NYSE: FDG) has found a new cause for concern: a shortage of tires. The company is reporting that it expects coal supply to be restricted due to a significant global shortage of haulage truck tires, expected to continue into 2007.

A Web search on tire shortages unearths reports from as far back as April that industrial-use tires were in short supply because of the Iraq and Afghanistan wars and explosive growth in China and India.

Just to see what tire manufacturers were doing, I went to Goodyear's (NYSE: GT) website and read through its turnaround strategy. I didn't find a word about industrial tires, although Goodyear is reporting strong overall results after years of earnings woes. There are quotes from Goodyear in newspaper stories, however, saying the company is aware of the need and intends to increase production.

The tire shortage may actually be good news for coal producers. Arch Coal's (NYSE: ACI) latest quarterly report states that coal consumption appears to be outstripping coal production for the third straight year. That should continue if tire shortages curtail production at producers like Fording. And if the tire shortage does last into 2007, it might keep coal prices elevated as well.

Coal is a business run with long-term supply agreements. Between now and 2008, the vast majority of Arch's existing contracts will expire, resetting to market-based pricing. If coal prices remain at current levels, Arch expects to see significant increases in profits and cash flow.

Investors, encouraged by the opportunity for continuing high coal prices, might want to explore coal company stocks that are far from their 52-week highs, like Massey Energy (NYSE: MEE), which is going through a capital restructuring, and troubled Westmoreland Coal (AMEX: WLB).

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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.