Please ensure Javascript is enabled for purposes of website accessibility

King Coal Losing Grip on Its Crown

By Howard Rothman - Sep 10, 2013 at 9:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Recent reports indicate softening demand and the resulting lower prices have spread worldwide and will continue through 2014.

Upton Sinclair coined the phrase 'King Coal' in a novel by that name published nearly 100 years ago. Despite protestations from a few contrarians, though, it appears the long-running reign of this once-dominant industry, along with the many companies under its umbrella, is under serious pressure.

And the latest news only underscores how perilous an investment in this sector could be over the next year or longer.

Coal remains the largest private-sector provider of jobs in the U.S. and is still the country's dominant power source. With energy needs growing rapidly in emerging countries like China, it remains in significant demand worldwide as well.

But with domestic utilities turning more to natural gas and environmental opponents working to keep more of the mineral in the ground, the industry continues losing more and more of its long-held grip. U.S. coal consumption has dropped 24% since 2007 as utilities switched to the lower priced and cleaner-burning alternativefor instance, and new federal clean-air regulations led to the closing of a record 57 coal-fired power plants in 2012 alone — with another 61 set to shut down by 2015, according to the Energy Information Administration. 

Recent reports indicate softening demand, and the resulting lower prices have spread worldwide and will continue through 2014. Here's a look at the producers and suppliers most likely to take a hit from the ongoing downturn.

The producers
Top tier coal companies such as Peabody Energy (BTU)Alpha Natural Resources (NYSE: ANR) and Arch Coal (NYSE: ACI) have all been struggling with the lower demand and weaker prices. They cut overall production last year to the lowest level in two decades and reduced costs along with it to help them weather the building storm.

But the bleeding hasn't stopped. The Colorado Mining Association, for example, announced in late August that coal production in the state was down 19% during the first half of this year compared to 2012 — which was higher than 2011 but still down nearly 25% from 2004. 

Five of Colorado's nine operating mines are reporting year-over-year cuts in production, the group said, including Arch's West Elk Mine near the town of Somerset. According to that company, it reduced output there by almost 25%, part of a nationwide effort to balance volume levels with market conditions. 

Peabody, the top U.S. producer by revenue, is a leader among its peers in trying to supplement the loss of U.S. business with global activity. It has an operation in Australia from which it ships coal to Asian markets and has been expanding its export infrastructure in the U.S. No. 3 producer Alpha Natural Resources says it now exports a fifth of its production and has become the largest U.S. exporter of metallurgical coal, a primary component in steel making. And No. 4 producer Arch is also expanding its export operations and has opened an office in Beijing to facilitate the process.  http://www.fool.com/investing/general/2013/06/13/2-good-coal-stocks-to-invest-in.aspx; 

The idea behind these moves is solid, but it certainly won't be a cure-all. China's economy has been slowing, and according to the U.S. Census Bureau coal exports there have been following suit.

The Suppliers
Coal production is a massive operation that requires a lot of very expensive machinery. For several years, a global development boom — again led by emerging nations like China — pushed the mining industry into something insiders called a "supercycle." The appetite for newer and better equipment was ravenous and the companies that produce it, led by Caterpillar (CAT 0.95%) and Joy Global (JOY), reaped the rewards. They also piled on costly acquisitions and created complicated joint ventures overseas that dramatically expanded their depth as well as their reach.

But those days are over, as recent earnings reports underscore all too clearly. The latest broadside came from Joy on August 28, when it announced quarterly earnings plummeted 36% from the year before and its order book and backlog continued to dwindle as large mining concerns like Peabody, Alpha and Arch keep slashing capital budgets.

Joy, which realizes two-thirds of its revenue from the coal industry, said customers have cut spending on new equipment by as much as half and dramatically reduced expenditures for high-cost maintenance and repair services as well. It also said the downturn that started in the U.S. has now spread overseas and projected these trends would accelerate through 2014, warning revenue next year could dip 20% below this year's anemic results.

Some analysts, looking at the mounting stockpiles and falling prices worldwide, responded by predicting additional downward revisions for 2014 and even 2015. Such cuts will also obviously impact Caterpillar, which is the world's largest manufacturer of mining equipment but somewhat less dependent on coal than Joy. Caterpillar did cut its 2013 outlook in July, but said at the time it expected some pickup in 2014. The recent announcement by Joy, however, seems to contradict that optimism.

The Foolish bottom line
For coal producers, the immediate future doesn't look very promising. All of these companies had a rough 2012, and at mid-point this year things are getting worse instead of better. Even more ominously, recent projections for 2014 by companies like Joy offer absolutely no reason for optimism.

For those who supply the companies that produce the coal, their fortunes will continue to run on a parallel track. Joy, for example, now says it is unlikely to surpass $4 billion in revenue next year — a far cry from the $4.57 billion that analysts had been expecting and the $5 billion the company still projects for 2013. 

For the foreseeable future, then, the best advice for investors is to look elsewhere. King Coal, it seems, is slowly but steadily abdicating its long-held crown.


Howard Rothman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$185.39 (0.95%) $1.75
Joy Global Inc. Stock Quote
Joy Global Inc.
JOY
Peabody Energy Corporation Stock Quote
Peabody Energy Corporation
BTU

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.