The Coal Debacle

• Posted by Robert Sinn
• on May 22nd, 2012

Coal stocks have been absolutely bludgeoned over the last several months – since the beginning of the year $BTU is down ~30%, $ANR is down over 40%, and $PCX at one point today was down over 80%. What is going on here?

The sector has been hit by a near perfect storm of weakening demand from China, cheap natural gas which is viewed as a cleaner alternative, production shortfalls, and companies which have increased their debt loads over the last several years. ANR faces interest expenses alone of roughly $180 million this year, meanwhile, ANR is projected to lose money for as far as the eye can see. Of course, ANR’s earnings prospects are highly dependent upon thermal coal prices going forward but as it stands now analysts are far from optimistic on thermal coal prices bottoming anytime soon.

Thermal Coal 5-year chart:

As usual the analysts have been well behind the curve maintaining lofty price targets on the group as the charts told a much different story:

$ANR analyst recommendations & price targets

 

$PCX analyst recommendations & price targets

Last summer PCX gave what I term a “disaster sell-signal“, since the monster gap down and large sell-off on July 26th 2011 the stock has been mired in one of the worst downtrends in the entire US equity market:

 

From my experience the #1 value of proper technical analysis is in being able to identify major warning signs. Paying heed to disaster sell-signals can save an investor a great deal of money in the long run – PCX is just one example out of many.

We can all look at the charts and see the ugly downtrends and the huge losses the coal stocks have suffered over the last year, however, where does the sector go from here? In my opinion it is fairly simple: What is the trajectory of the Chinese economy over the next 3-5 years and what does that mean for thermal coal prices? Does natural gas remain around $2.50 or have we seen the bottom and do prices rise from here?

Simply put a stock like ANR at 11 bucks a share has almost turned into a call option on the Chinese economy and thermal coal prices, however, just like a call option it will bleed time premium if China continues to deteriorate and thermal prices continue lower. So far nothing in the ANR chart indicates any sort of bottom is forming – bulls really need to see something like an outside reversal day on 30+ million shares of volume, the continued orderly grind lower with every bounce being sold into is indicative of still lower prices ahead.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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