It all started in the spring of 2011 when coal producers began seeing meaningful market share losses manifest in their balance sheets. Since then the Market Vectors Coal ETF (KOL) has lost approximately 60% of its value. This ETF is a compilation of 34 global coal related companies varying in market caps. Two of the top three holdings in this fund are from the United States, representing approximately 15.84% of the total holdings. They are Consol Energy (CNX -0.12%) at 8.47% and Joy Global (JOY) at 7.37%.
The best way to ascertain how investment-worthy this fund is would be to take the future of these top holdings under consideration. So let's take a closer look at each.
Some Consolation
Consol Energy is being kept afloat by large expansions in its natural gas division, up 17% quarter over quarter. So credit management with some foresight to recognize the future of natural gas vs. coal.
Demand remained weak in its coal division, but lower operating costs of 10% helped to offset lower sales prices. Even these cost-cutting achievements can't hide the brutal reality that significantly lower pricing has brought the average profit margin per ton down from $52.57 in Q3 of 2012 to $18.59 in Q3 of 2013.
With management indicating no catalyst for a rebound in pricing, these slender margins could be the new reality for Consol's coal division. Thank goodness for its burgeoning natural gas operations, which should provide some stability during these tough times -- but not enough for me to recommend holding it in your portfolio.
Not so Joyful
Joy Global is a supplier of heavy machinery to coal miners and other commodity producers. Joy just reported Q4 2013 results and they were disappointing to say the least. The 87% decline in year over year earnings from $1.99 in Q4 of 2012 to $0.25 is just the tip of the iceberg. Total bookings were down 17%, net sales decreased 26%, and things are not looking any better for the future.
Ted Doheny, Executive Vice President and CEO-designee stated "we have just finished another transitional year for our end markets as global capacity continues to exceed demand. This resulted in most mined commodities remaining in surplus and has led to prices for industrial metals and bulk commodities declining 20% to 40% over the last 18 months." Mr Doheny gave no indication that this condition would abate. Instead, he guided very conservatively saying "for fiscal year 2014, we expect revenues to be between $3.6 billion and $3.8 billion."
Overall, as the commodity market goes, so does Joy Global. When things are hot and commodities are in high demand then so is Joy Global's equipment. But with surpluses looming and low demand in key markets, decreasing prices will continue to hurt many commodity producers. Look for them to curb costs and that means spending on new equipment. Until anticipation begins building for the next commodity boom I'm afraid Joy Global may underperform.
Foolish deep thoughts
Often producers plan ahead when they see boom times coming with purchases of equipment. That would benefit Joy Global. But things are quiet at Joy, indicating that the future of coal looks very slow. Whether it's pricing competition from natural gas or increasing government involvement, the coal sector will continue to see some tough times ahead.
