Here’s Why Coal Stocks Stink

Jun 23, 2012
J. Webster
Comments Off on Here’s Why Coal Stocks Stink

Coal stocks have been suffering for what seems like months now. Every coal stock is at or near their 52 week low. Traders keep coming in and buying them saying they’ve bottomed out only to see the stocks go lower and lower.

Just take a look at Patriot Coal, trading for a dollar and 26 cents. Alpha Natural Resources is close to $8 a share. Arch Coal cut their dividend and trades near $6 a share. It’s a sad tale for coal stock owners.

Coal stocks have been hit by excess and cheap natural gas and the economic slow down across Europe and the entire globe. But the main reason coal stocks are struggling, and some perhaps on the verge of bankruptcy, is the slow down in China. And this China slow down might be even worse than previously thought:

Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said.

Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries. New York Times

Here’s some more bad news regarding coal stockpiles in China – they’re growing and on par with the financial collapse of 2008. That’s a bit scary:

Rohan Kendall, senior analyst for Asian coal at Wood Mackenzie, the global energy consulting firm, said coal stockpiled at Qinhuangdao port reached 9.5 million tons this month, as coal arrives on trains faster than needed by power plants in southern China. That surpasses the previous record of 9.3 million tons, set in November 2008, near the bottom of the global financial downturn.

The next three largest coal storage areas in China — in Tianjin, Caofeidian and Lianyungang — are also at record levels, an executive in China said.

When will coal stocks truly bottom out? That’s really a tough question to answer. Nobody really knows. Surely coal won’t go away as a energy resource anytime soon, but calling the bottom in these stocks is becoming increasingly more difficult when China numbers aren’t even real.

If you’ve got the stomach for pain then it maybe payoff to buy shares of these battered coal stocks, but prepare for the worse in some names.

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