Coal stocks, like most other commodity-related stocks, have been beaten like a rented mule lately on Wall Street. Many of these stocks, such as Peabody Energy (BTU) and Bucyrus International (BUCY) are down 40% – 50% over the past two months. Is this justified?

On a fundamental basis, the drop in coal stocks is not justified. Worldwide demand for steel is expected to grow at a 4% – 5% rate over the next several years. This demand is being driven by the industrialization occurring in the emerging markets. This growth rate exceeds the current capacity of both iron ore and metallurgical coal producers. Prices for both iron ore and coal have gone up from 300% – 400% over the past few years and prices are expected to rise again next year.

Thermal coal demand has been driven by the electrification of emerging market countries. Earlier in 2008, supply was not keeping up with demand as stockpile levels became depleted in emerging markets countries such as China, India, Chile, and South Africa. Thermal coal demand in China continues to exceed supply with current stockpile levels below three days of usage. The demand for coal in China will only increase with 80 new coal-fired power plants due to come on line before the end of the year.

Thermal coal supply continues to be restricted by several factors. One factor is the problems that major exporters, such as Australia, are having with their port facilities. Ships are waiting literally months to be loaded with coal. Another factor is the export restrictions many coal-producing countries, such as Indonesia have levied.

The United States, which is considered to be the Saudi Arabia of coal, has become the swing supplier of coal to the international market. Exports of coal in 2007 were 59 million tons and through the first half of 2008, exports of coal were running about 50% higher than last year.

Let’s not forget about the increasing demand for coal here in the US. There are many new coal-fired power plants scheduled to come on line by 2013. Just the demand for coal from these new plants is expected to increase the demand for coal by approximately 80 million tons.

Another interesting point is that the actual price of coal has not fallen like the exchange-traded commodities. The price of coal has been fairly unchanged over the past few months. In fact, the spot price of coal remains well above the contracted prices for coal.

None of the recent movements in the prices of the stocks in this sector make sense fundamentally. Wall Street is acting as if the billions of people in the emerging markets and elsewhere have suddenly disappeared from the face of the Earth.

Some of the major coal stocks ravaged by Wall Street and that might be worth a look include: the two mining equipment machinery companies, Joy Global (JOYG) and Bucyrus International (BUCY); and the major US coal producers, Peabody Energy (BTU), Arch Coal (ACI), and Consol Energy (CNX).

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