How Low Will Patriot Coal Go?
May 7th 2012 12:25PM
Updated May 7th 2012 12:26PM
Shares of Patriot Coal (NYS: PCX) hit a 52-week low on Friday. Let's look at how it got here and whether clouds are ahead.
How it got here
The simple fact is that we're using less coal than we used to and it's hurting coal stocks across the board. The U.S. used to be powered by coal, a cheap and abundant source of energy, but the falling cost of both natural gas and renewable energy has thrown a wrench in that energy dynamic, and that's why coal stocks are reaching new lows. Alpha Natural Resources (NYS: ANR) , Arch Coal (NYS: ACI) , and Peabody Energy (NYS: BTU) have followed Patriot Coal lower because of concerns over future demand.
It's been a long, drawn-out crash that never seems to end.
Who saves the day?
For a while now, the thesis has been that China will eventually save coal stocks. China's growing economy needs all the energy it can get and coal is a big piece of the puzzle. Add metallurgic coal to the mix and demand overseas should make up for weak demand in the U.S.
The problem with that is China doesn't want to be dependent on anyone else for imports and has a lot of pressure to move away from coal, which is a big contributor to pollution. China is putting limits on coal demand until at least 2015 and is bringing its own production up to meet the demand from electricity producers. The country is expected to add 750 million tons of annual capacity by 2015, lessening the need for imports if coal usage is in fact curbed.
Low-cost natural gas may also be on its way to China. The fracking boom that has driven price down in the U.S. is just now grabbing hold in China and production of natural gas is expected to increase quickly. If the United States was any indication, this should lead to lower-cost natural gas and a push toward natural gas electricity generation.
A month ago I said it was time to abandon coal stocks, something that readers disagreed with vehemently. But coal stocks are touching new lows by the day and I don't see much light at the end of the tunnel.
The low cost of natural gas will continue to put pressure on electricity generation from coal domestically, and China's building boom is slowing. As Chinese economic growth slows and China produces more of its own coal, companies will struggle to find demand sources.
CAPS members aren't jumping ship, giving the stock a middle-of-the-pack three-star rating, but I'm not calling a bottom here. Eventually, coal stocks may regain some of their losses; I just don't want to get burned trying to catch a falling knife.
At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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