Arch Coal: Taking a Side on an Uncertain Outlook
I bought Arch Coal (ACI) last week on the thesis that the rise in natural gas prices along with the colder than expected March would lead to a change in perception from investors about the coal market. I added to that position on weakness this week and now have what I would consider a full position (which is still only moderate in size because, as I described last week, my confidence in the natural gas thesis is somewhat tentative).
On Thursday I was pleased to see comments from Peabody Energy (from Seeking Alpha) that will contribute to the perception shift.
Now turning to the U.S. market, we have seen a dramatic improvement in coal fundamentals from this time last year. We now project 60 million to 80 million tons of increased coal demand in 2013 as the industry reclaims the majority of demand lost in 2012 to natural gas.
Within the U.S. market, winter was 17% colder than last year and natural gas prices have more than doubled from last April driving a 15 million ton increase in the first quarter coal burn at the same time the gas generation dropped 11%. Coal now accounts for approximately 40% of total generation, while gas has fallen to 24%. The supply side of the equation was also favorable in the first quarter as U.S. coal shipments fell 10%.
The end result is that PRB and Illinois Basin stockpiles have improved 20% over the last year, and over the next five years, we expect the low cost PRB and Illinois Basin demand to grow more than 125 million tons to a greater capacity utilization and regional switching, and this is after taking into account an estimated 60 gigawatts of retirements during that time.
You see U.S. generation only ran at 55% of full capacity in 2012. These plants can run much harder and utilities have invested more than $30 billion in new equipment over recent years to allow them to do just that. Read more
Reminiscences of a Stockblogger 