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A Little Heat in Thermal Coal

By David Urani

A few of the more thermal-oriented (as opposed to metallurgical) coal stocks are picking up steam today, including Arch Coal (ACI), James River Coal (JRCC) and Consol Energy (CNX). Indonesia, the world's largest exporter of thermal coal, along with China showed increased contract prices for the fuel.

Meanwhile, Consol itself provided a capex update which rang true to prior comments that it would cut back on coal production in favor of more natural as investments. With respect to Arch and James River, a little less focus by this competitor could mean some modest price improvement or market share opportunity. Note that ACI and JRCC (both up more than 8% today) are both highly levered, and susceptible to more large moves like today's either up or down. Following a bankruptcy filing by Patriot Coal last month, some of the more troubled coal names have been on liquidity watch.

Also of note is a run-up of approximately 15% in natural gas prices over the past seven sessions. Signs are that the winter is getting colder, and that was confirmed by a drop in weekly natural gas supplies on Thursday. That takes natural gas back up past $3.50, and it's between here and $4.00 where coal returns as an attractive alternative to natural gas for power suppliers.

Obviously it's a beaten down sector due to the rapid rise in natural gas production in America, along with tough new regulations by the EPA. Nevertheless, some positive developments in coal's favor can lead to some large, sharp gains for these high-beta stocks as we're seeing today.


David Urani
Wall Street Strategies

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