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