Thursday, October 29, 2009

Mr Coal Optimist vs Pessimist?

Two large coal miners, Patriot Coal (PCX) and Massey (MEE) reported earnings this week. The media has portrayed PCX;s earnings report as being good while MEE's earnings report being bad. The optimist was rewarded with a jump in the stock price after the release while the pessimist was punished. Reading between lines, they both are telling the same story. Just in different tones.

in an article of Miningweekly,

The CEO Richard Whiting said on Tuesday that markets for both coal segments remain "challenging", but that the company expects to see improvements during 2010. The demand for its steelmaking and thermal coal will recover strongly in the “near term” according to Whiting.

“We believe the markets are at an inflection point, poised to see a substantial improvement in demand in 2010, in both metallurgical and thermal coals,” Whiting said on a conference call.

“While we don't expect the market recovery to be in full swing by early 2010, we are optimistic that the timeline for recovery is more within our sights than it seemed just a quarter ago,” said CFO Mark Schroeder.

He said there is no doubt that metallurgical coal demand around the world is rebounding.

“And because of the limited availability of high quality met coal in the world, our forecasts show demand outstripping supply, and therefore driving up met pricing as we move into and through 2010.”

Patriot is also expecting to see domestic demand for thermal coal improve “significantly” in the next six to nine months.

Demand will likely exceed supply for US thermal coal, especially for central Appalachia, around the end of 2010, he said.

“And the change from oversupply to undersupply may be abrupt, taking place over a very short period of time.

“With upward pressure on demand and downward pressure on supply, we believe the effect on pricing will be meaningful.”

Although inventories remain high, customer sentiment is showing signs of improvement.

in a report at Yahoo Finance,

The CEO Blankenship said worldwide production and use of coal will likely increase by more than 120 million tons per year during each of the next five years.

But "the macroeconomic factors facing all businesses and particularly the coal industry have never been more
challenging," he said.

He expected domestic thermal coal demand to remain weak for the next several quarters and perhaps through 2010. Utility stockpiles remain very high and the amount of coal being burned was low.

"We continue to be encouraged by the positive news we are hearing from the seaborne metallurgical coal export markets," he said, noting steel production in China was up 22 percent in August and 5 percent for the first eight months of the year.

Steel producers have restarted or announced plans to restart more than 40 blast furnaces that have previously been idled, Blankenship said, adding that Massey has the capacity to produce more than 12 million tons of metallurgical coal per year.

Supply will be constrained by permits

At PCX, in a report by Miningweekly,
"Supply will be constrained by the delays that miners face getting new surface mining permits, and a lot of production that has been taken off line may actually leave the market permanently," Whiting speculated.

At MEE, in a report by Reuters,
"The demand for coal to generate power and make steel is growing, but environmental bureaucracy is making it more difficult to mine the fuel," Blankenship  said on Wednesday

Last month, the EPA ruled that all 79 pending mine permits in Appalachia must undergo additional evaluation, because they pose a potential hazard to water in parts of Kentucky, West Virginia and Ohio.

In a nutshell,
No significant recovery is expected before the end of 2009. The demand for metallurgical coal is looking good, expected to come around in early 2010.The demand for thermal/steam coal is expected to come around only in later part of 2010.

Is it just me or it's the tone of Mr. Whiting and Blankenship? Had Mr Blankenship colored his speech with more adjectives like "significant", "substantial", "optimistic", "near term", the stock price probably would have received "significantly" more generous treatment from the Wall Street.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author has no positions of PCX and MEE in her personal account as of October 29,2009


Anonymous said...

what's coke's comment on coal? actually I am planning to buy some to hold on PCX.

coke said...
This comment has been removed by the author.
coke said...

right now, I am modestly bullish on coal toward the end of the year and early next year.

But I am more concerned about the broader market rather than individual sectors at this point. I don't see many sectors that can be strong enough to be unaffected by the broader market correction.

I would be more comfortable to get into basic materials after US/JPY and US/EURO show some signs of stabilization or Dow gets to around 9650,whichever comes later.

Anonymous said...

thanks Coke.
I cannot see that far. :) what I am thinking is, oil should stabilize on some higher level before coal sector has a break up movement

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