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Goldman Bearish on Coal Stocks

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By: Troy Kuhn
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US coal producers benefited from coal exports as the Australian dollar strengthened in 2011. A stronger Australian dollar had led to a sharp decline in Australian coal exports and the demand for US coal increased instead. But as the Australian dollar has now dropped more than 20 cents from its highs and is expected to depreciate further, US coal exports will drop, hurting revenues of US coal producers.

Goldman Sachs’s Expectations

Goldman Sachs analyst Neil Mehta lowered his target for Alpha Natural Resources (ANR) and Walter Energy (WLT). Mehta also maintained his sell rating on Arch Coal Inc. (ACI) and called the stock a top sell idea, with a target price of $3. The target price for Alpha Natural Resources was cut from $9 to $8 and from $18 to $16 for Walter Energy.

Mehta said that a drop in metallurgical coal prices from $147/MT (metric ton) to $140/MT in the last three weeks led to US coal stocks trading lower. He added that according to a number of publications, a weaker Australian dollar caused strong coal exports from Australia to continue. Slowing Chinese imports of met coal due to high inventories will also push coal prices down.

Goldman forecasts that met coal prices will improve from $152/MT on average in the fourth quarter of 2013 to $160/MT in 2014. Mehta believes the recovery in met coal prices will be gradual, and favors companies that are cutting costs, like Peabody Energy Corp. (BTU), and have restructuring potential, like SunCoke Energy Inc. (SXC).

Consensus Estimates

Analysts expect the global coal supply for met coal and thermal coal to increase 3-4% in 2014, leading to excess supply. Excess coal inventories, coupled with increasing coal exports from Indonesia, will have a negative impact on the prices of thermal coal in 2014.

The consensus among analysts is that prices of coking coal will increase 10% and thermal coal prices will increase 1-3%. Thermal coal prices are expected to increase due to a rise in Chinese thermal coal imports. This was seen in October when Chinese thermal coal imports increased 9.8% year-over-year (YoY). Analysts see higher stock levels at Chinese and Indian power plants as a headwind for thermal coal prices in 2014.

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Bidness Etc’s Take

Bidness Etc believes that the trend which will most suppress coal prices will be the switch from coal to natural gas. Coal producers are experiencing a decline in demand, evident from the 5.45% YoY decline in coal shipments for US producers in 3Q13. Average selling prices for US coal miners have declined 2.4% YoY in 3Q13, while cash margins in 2Q13 shrunk to $3.18 per ton, a fall of 68.8% YoY.

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Thermal coal inventories at Chinese power plants are at historical highs and Indian power plant coal inventories are up 120% YoY, while Chinese ports’ coal inventories have declined 32% since June 2013 to 19.15 million MT. Coal demand from US power producers is also declining, and it is expected that there will be around 58.7 gigawatts of coal retirements (closing down of coal-fired power plants) by 2020. All of this was reflected in the profitability of coal producers around the world; gross margins fell to 8.9% in 3Q13, half of what they were in the previous year.

The weakening of the Australian dollar, oversupply and an excess coal inventory will keep coal prices suppressed in 2014. Coal producers may see a short-lived rally in 1Q14 but in the longer term, coal stocks are good short candidates as revenues decline and profitability contracts further.

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