Coal Stocks Rally Pre-Earnings

Shares of Peabody Energy (BTU - Analyst Report), Arch Coal (ACI - Analyst Report) and CONSOL Energy (CNX - Analyst Report) rallied more than 6% in Wednesday’s trading. These companies will start reporting their second quarter results as of next week. Peabody will report on 21st, followed by Arch on 24th and CONSOL on 30th.

Patriot Coal (PCX - Analyst Report), Natural Resource (NRP - Snapshot Report) and Walter Energy (WLT - Analyst Report) also joined the race. Patriot rose nearly 6% and Natural and Walter went up more than 4%. Walter will report on 22nd of this month and Natural on 6th of August. Patriot is yet to confirm the date.

Coal demand in the U.S. is expected to remain subdued this year due to low power consumption and weak industrial activity. However, demand is growing in Asia -- especially in India and China. As per China customs, China has imported 32.2 million ton of coal through May this year -- up 72.6% year-over-year. Coal exports from China declined 43.1% to 10.5 million ton during the same period.

On the other hand, thermal power plants in India are operating at low stock levels. The Coal Ministry of India expects a deficit of 70 million tons during the current fiscal ending March 2010.

Of late, coal prices in the international market have started showing mild signs of recovery, primarily led by Asia. The globalCOAL NEWC index, a benchmark for coal prices in Asia, ended at 72.64 last month -- up more than 18% from March this year. The index indicates a reference price for thermal coal delivered on an FOB basis at Newcastle Port in New South Wales, Australia. Growing demand led by an expected economic recovery by the end of this year may further stimulate coal prices.

We expect the coal producers to present an optimistic outlook for the remaining half of this year, as well as for next year. Coal exporters to the Asian markets may reap good yields going forward. We presently have Buy recommendations for CNX, NRP and WLT and Holds for BTU, ACI and PCX.