By David Randall and Allison Martell
June 28 Dave Steinberg often feels like one of
the last remaining bulls in the tumbling U.S. coal market, and
even he struggles to put a happy face on the industry.
Coal stocks "have been terrible," said Steinberg, a managing
partner at Chicago-based DLS Capital Management, which oversees
$350 million in assets and owns positions in coal producers such
as Peabody Energy Corp, Arch Coal Inc and Alpha
Each stock had fallen more than 40 percent for the year at
Thursday's close, and was down at least 24 percent this month,
to levels Steinberg calls "absurd." All told, Steinberg has lost
"more than I would like to admit," he said.
"I've been in the business for 30 years and I don't think
I've ever seen worse sentiment," he said, adding that he thinks
each company is worth "at least double" its current trading
price. He sees rising consumption and falling inventories
stabilizing prices over the next year - a view that not many
other investors share.
Despite their relative optimism, Steinberg and other coal
bulls have a tough road ahead, with few believing they've seen
the bottom for coal stocks even as some hit 10-year lows.
Most U.S. coal miners sell a mixture of thermal coal, used
to generate electricity, and higher-margin metallurgical coal,
used to make steel. Right now, both markets are under pressure.
With the shale gas revolution cutting the price of natural
gas, U.S. power plants have been burning less coal. And the
threat of regulation that could discourage coal generation -
like the carbon rules promised by President Barack Obama on
Tuesday - has cast a shadow over the U.S. thermal industry.
Nomura analyst Curt Woodworth believes the most recent slump
in coal stocks has been largely driven by a slide in the global
coking coal market, as steel production slows and the Australian
coal supply recovers from some operational problems.
"I think we're getting close to the bottom - I'm not sure
we're there yet," said Woodworth, who covers U.S. metal and
mining companies. Shares have fallen, Woodworth said, but so
have earnings, so the stocks are still "very expensive."
Investors that are bullish on the emerging economies see
long-term potential in steel, and thus in metallurgical coal.
But right now the slowdown in Chinese growth, paired with a glut
of capacity, is weighing on the steel market.
Benchmark coking coal has dropped to $145 a tonne for the
third quarter, its lowest since 2009, from $172 in the second
quarter, according to Doyle Trading Consultants.
Any investors looking for relief in the thermal coal market
suffered a blow on Monday, when the U.S. Supreme Court agreed to
revisit a lower court ruling that invalidated the Cross-State
Air Pollution Rule. The rule, which limits nitrogen oxide and
sulfur dioxide emissions from coal-fired plants in 28 states,
could cut coal demand.
Then on Tuesday, President Barack Obama said he had directed
the Environmental Protection Agency to craft new carbon emission
rules for thousands of power plants, the bulk of which burn
Any rules are likely to be challenged in court and take
years to implement, but even if the regulatory push fizzles,
thermal coal miners may still face competition from cheap
Given the competition and regulatory risk, KeyBanc Capital
Markets analyst Mark Parr said he remains "cautious" on the coal
industry, wary of both metallurgical and thermal sectors.
NERVES OF STEEL
But even with share prices tanking, some buyers do remain.
Brian Burrell, an energy analyst for the $28.7 billion
Thornburg International Value fund, said it has been
adding to its position in Canada's Teck Resources Ltd,
whose revenue is split between metallurgical coal, copper and
The company's shares have fallen nearly 40 percent year-to-
date, but he points to rising steel demand in emerging markets
countries, Canada's political stability compared with
competitors, and Teck's share buybacks as reasons for optimism.
Other investors are turning toward master limited
partnerships, or MLPs, that produce and distribute coal.
Structured much like real estate investment trusts, these
companies pass through most of their revenues to investors. They
are less sensitive to spot coal prices because they have
long-term hedges and contracts that give them constant revenue
Darren Schuringa, a managing partner at New York-based
Yorkville Capital Management, has been shying away from coal
equities given that the spot price is "too tough to forecast,"
he said. Instead, he has been buying Alliance Resource Partners
LP and Natural Resource Partners LP. Both MLPs
are up more than 10 percent for the year, offer yields of 6
percent plus, and are on track to increase their cash
distribution this year, he said.