Negative News You Need to Know About Coal Right Now

Despite environmental concerns, coal companies’ management is very bullish on the prospects for their product.  Arch Coal (NYSE:ACI) recently paid $3.4 billion to acquire International Coal (NYSE:ICO) in May.  And Alpha Natural Resources (NYSE:ANR) acquired Massey Energy (NYSE:MEE) back in January.  Finally, Walter Energy (NYSE:WLT) acquired Western Coal for $3.3 billion in December.

But all of these deals were done when coal prices, and other commodities, were soaring.  The problem with coal companies, and other companies whose product is a commodity, is that their stock price, and hence the market capitalizations of the companies, is inextricably linked to the volatile commodities markets.  Coal prices had increased over the past year due to Arab unrest and concerns about the viability of nuclear power in the wake of Japan’s earthquake.  But neither geopolitical nor geological instability is a basis on which coal prices can reach a permanently higher price.  Given how many trillions of cubic feet of coal there is left to be mined in the world, its supply, in the short- and intermediate-term, at least, is not a question.  Therefore, its price has increased not on fundamental factors but rather on temporary concerns about current events.

Indeed, the one-month performance of Market Vectors-Coal ETF (NYSE:KOL) has been disappointing: a 2% decline from its high of $51.50 to a recent price of $48.  Year-to-date the ETF has increased 2%, but that has been a very volatile 2% increase.

There is no doubt that commodities have a place in a diversified portfolio, and there is no doubt that coal companies have some inherent value.  But the recent run-up in coal prices seems to be an artifact of exogenous factors, and not due to a fundamental problem with the supply of coal.  Investors, and coal company management, should be wary of extrapolating from recent price history to infer future value.

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