What can I say – this is simply an epic move. As I keep saying this group reminded me of fertilizer last summer/fall – totally underestimated. I am simply amazed by the strength and voraciousness of this move, even as a super bull on the group. Yet another upgrade today in the group and you are seeing some huge earning revisions and price targets across the board – analysts finally “get it” – after about 40-70% 1 month moves across the board. Always timely these analysts Again, these guys focus on 1 industry (career/full time job devoted to 1 sector) yet missed the whole rocketship, only after the ship is in orbit do they “get it”? Where were they 2 months ago when the writing was on the wall i.e. [Apr 7: Posco (PKX) Agrees to 200% Coal Price Increases]? Now come the upgrades? Again, EXACTLY the same scenario that played out in fertilizer. Just more “value add” from these fellas.

• A Friedman, Billings, Ramsey analyst significantly raised his coal price predictions and upgraded a major miner to “Outperform,” suggesting that demand will far outpace supply through 2010.
• Analyst David Khani raised his price forecast for metallurgical coal, which is used in steel production, by 90 percent for 2009 to $130 per ton. For 2010, he raised his expectation by 130 percent to $250 per ton.
• For steam coal, used in boilers to produce electricity, Khani raised his predictions by about 25 percent in 2009 and 2010.
• Based on his new price expectations, he upgraded Massey Energy Co. — the fourth largest U.S. coal producer by revenue — to “Outperform” from “Market Perform.”
• Khani noted that lower supply and booming international demand is keeping the metallurgical coal market extremely tight. The steam coal market in the U.S., he said, is undersupplied as power generation demand accelerates the need for the commodity. He suggested that supplies will dwindle at the end of next year and prices should rise at a rapid rate.
• The analyst lifted his 12-month price targets for all the U.S. coal companies he covers, and added Patriot Coal Corp. as a “Top Pick.”
• Risks: Khani said a weakening global economy, increasing credit defaults and soaring prices for drybulk ships — which transport coal overseas — could all weigh down the sector’s growth rate.

TheStreet.com has an in depth article out today as well, nothing new to our readers who have been following along this story before the mainstream jumped on [Dec 6: Coal Stocks Quietly in Bull Market] Judging from web traffic in which I’d say about 1/2 of my Google hits the past few days are some incarnation of “coal” (just like 3 months ago they were some incarnation of “fertilizer” or “agriculture” or “rice”) I can see the story is catching on. Which again, makes me short term concerned about the group…. but we’ll keep riding with what we have left.

• The price of U.S. coal futures solidly crossed above $100 per ton this month, more than double what they were six months ago.
• About two-thirds of the world’s coal currently goes to fuel electrical plants and the rest goes primarily into steel and concrete production. New demand is coming from emerging markets. Together, according to U.S. Department of Energy estimates, China and India will account for 70% of the increase in world coal consumption over the next two decades.
• The biggest difference is that global supply conditions have fundamentally changed over the last year, especially in the two largest consuming countries.
• China, the largest producer of coal in the world, is no longer coal self-sufficient. The booming economy was made possible by more electric power and steel plants, which both require coal to operate. The Chinese will eventually have to bring in more shipments of coal at higher prices, putting more upward pressure on global seaborne coal prices to sustain economic growth.
• The story is nearly the same in India. Despite its reserves and production, India is not coal self-sufficient either, and has reduced exports too.
• Supply disruptions and the lack of coal self-sufficiency in Asia and coal supply disruptions have created an immediate global problem.
• Australia is normally the largest exporter of coal in the world. Last year, Australia accounted for 65% of the world’s coking coal exports. But, due to disastrous floods, six of the largest coal exporters in the world legally failed to deliver on contracts. This is a huge drop in supply.
• Normally, other coal exporters would fill the gap. But South Africa has experienced structural power shortages and Russia is focusing on exporting gas, not coal. So that leaves the business to other players — like the U.S. coal companies that also benefit from a lower dollar exchange rate.
• New coal capacity can’t be turned on overnight. It takes time, money and corporate/government partnerships to create new integrated mine-railway-port projects for coal. (sounds a lot like potash fertilizer, eh?)
• While many coal production projects have been announced worldwide, these are not likely to have an impact on current supplies until 2010. In the meantime, prices for available coal will continue to climb.
• The largest U.S. exporter of coking coal is Alpha Natural Resources(ANR), with a 22% market share of exports.
• The coming higher coal prices will drive larger public companies to buy into coal companies to ensure they have supplies. Even smaller coal companies with poor earnings records are candidates for bolt-on acquisitions. (we’ve discussed this in the past – just another potential upside to these stories)
• Take a look at Patriot Coal(PCX). It posted losses last year, but the stock is up 190% just in the last six months. The acquisitions, new capital raised and higher coking coal prices are making investors salivate over the potential returns.

Long Arch Coal, Massey Energy, Alpha Natural Resources in fund; long Arch Coal in personal account

Last 5 posts by Trader Mark

• U.S. Still Seems More Apt for Deflation in Near Term - March 4th, 2010
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