Tuesday, September 11, 2012

Coal is knock, knock, knocking on heaven's door (hell's ceiling)

Coal stocks continue to rally, following through on Friday's strong gains, as inflation expectations increase and traders begin to anticipate tighter supplies. The later is on BHP and Xstrata announcing production cutbacks at their Australian operations (mentioned here), which I think should help alleviate any supply concerns in the seaborne coal markets.

It appears that many coal miner stocks have surpassed or are testing their 50-day moving averages. I think the market is telling investors, or at least it is discounting, that the fundamentals in the thermal coal markets are set to improve. The stock prices for companies such as Arch Coal, Peabody Energy, and Alpha Natural Resources are all flirting or have broken their 50-day moving averages.

More telling are the charts on  Consol Energy (ticker CNX) and Cloud Peak Energy (ticker CLD). Both have clearly broken their respective 50-day moving average and are in early uptrends.


CNX and CLD are largely thermal coal coal miners. Although CNX is also a large player in natural gas production and the stock may be benefiting from an improvement in gas prices, CNX's Northern Appalachian coal production is largely also focused on the thermal markets, with about 84% of production going towards power generation. CLD, in contrast, is a Powder River Basis (PRB) coal producer and all of its production is sold to utilities for electricity generation. Interestingly enough, not only has CLD's stock price broken the 50-day moving average, but it has also broken the 200-day moving average.

This is very telling. PRB coal is priced at discount relative to Appalachian coals, due mainly to its lower heat content. In fact, PRB coals have traded in a range between $14 to $7 per ton over the last few years versus prices averaging $50 to $80 per ton for Appalachian coal. The lower price makes PRB coal more leveraged to the price of substitutes, i.e. natural gas. CLD breaking it's 200-day moving average tells me that the decline in the stock is complete. More importantly, it also tells me that the fears that natural gas will replace coal in energy generation are overblown and that thermal coal markets are in (are will shortly be in) a full recovery.

And if the thermal coal markets are in/nearing full recovery while shares sold short are approaching all-time highs....... do you see any upside potential in coal?




No comments:

Post a Comment