Peabody Energy Corporation (BTU), Alpha Natural Resources, Inc. (ANR): Is This the Right Time to Buy Coal Stocks?

According to Peabody Energy Corporation (NYSE:BTU), coal demand rose 8% in the first quarter and accounted for nearly 40% of total electricity generation. The company expects 2013 US coal consumption for electricity generation will grow by 60 million to 80 million tons over 2012 levels. Arch Coal CEO John Eaves expects domestic coal market fundamentals to improve in the second half of 2013.

However, the trend is not expected to continue, as higher gas prices would lead to increased supplies in the future. Not surprisingly, the EIA said in its report that coal consumption will grow at a more modest pace of 1.8% in 2014.

Long-Term Positives, Near-Term Bearishness

The outlook for coal producers has certainly improved. Cost-cutting measures, robust overseas demand, and a rebound in US coal demand are good signs. However, some concerns still remain that make coal stocks unattractive, at least in the near-to-medium term.

The biggest is China, which is planning to reduce coal consumption in some industrial regions due to pollution issue. In April, Goldman Sachs cautioned that China’s imports of thermal coal could contract in 2013. This means that any improvement in the US demand would be offset by weakness in China.

Demand in India is expected to remain robust; however, the country imports most of its coal from Indonesia. In addition, mounting current account deficit may force India to boost domestic production.

Given these factors, I am still bearish on US coal producers in the near-term. I would wait for the coal market to further stabilize and US coal producers’ cost cutting measures to take full effect before taking a long position.

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Varun is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Is This the Right Time to Buy Coal Stocks? originally appeared on Fool.com and is written by Varun Chandan Arora.

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