Christmas, it seemed, had come early for shareholders in US coal companies. By mid-summer, the price of some varieties of coal had tripled. Meanwhile, the shares of the four major producers – both the red-hot eastern region miners Consol Energy and Massey Energy, and those digging up lower value, higher volume western grades, Arch Coal and Peabody Energy – had rallied by between 44 and 168 per cent. However, the enthusiasm did not last. This week the shares of these companies fell as much as a quarter.

The rout was caused by more than the broader slump in energy and mining stocks. Investors were spooked by a worrisome rise in stockpiles at power generators. They are at a fairly robust 7.7 per cent above their 10 year average, according to analysts at Stifel Nicolaus. This is thanks to an unusually mild August, which damped power demand, and a rail network that, unusually, kept supplies running smoothly. As a result, spot prices fell.

The stock market sell-off looks like an overreaction to these weaker spot prices – which represent only a small proportion of company sales. Take Peabody, the world’s largest producer. It has already agreed delivery prices for all its coal this year. That is why its revenues did not rise as fast as spot prices earlier this year. But it also bodes well for 2009 when 80 per cent of its coal is already spoken for at higher prices, with a smaller proportion the next two years. Cheaper natural gas should not be a major concern either, given that it only competes at the margin as a generation fuel.

The recent rout leaves US coal shares looking cheap at between 5.5 and 7.6 times next year’s earnings. Meanwhile, fundamentals are robust. The largest expansion in new coal plants since 1980 is underway at home, while an even bigger Chinese plant-building boom is buoying exports abroad.

To email the Lex team confidentially click here


To post public comments click here

Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe now

If you have questions or comments, please email or call:

US and Canada: +1 800 628 8088

Asia: +852 2905 5555

UK, Europe & Rest of the world: +44 (0)20 7775 6248

Get alerts on CONSOL Energy Inc when a new story is published

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Comments have not been enabled for this article.

Follow the topics in this article