Is the Coal Market Heading For a 2013 Rebound?

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Coal stocks are enjoying a boost on Monday following strong manufacturing data out of China. Shares of Alpha Natural Resources (NYSE:ANR) and Walter Energy (NYSE:WLT) climbed about 6 percent, and shares of James River Coal Company (NASDAQ:JRCC) and Peabody Energy Corp. (NYSE:BTU) climbed about 5 percent after HSBC reported that China’s PMI grew 1 point to 51.5, is highest rate in 18 months.

Is this evidence of a long-term trend or just a short-term pop?earnings

The coal industry’s struggles have been well documented over the past few years. The Market Vectors Coal ETF (NYSE:KOL) is down 48 percent since December 2010, and has fallen nearly 28 percent this year to date. Natural gas prices plummeted in the wake of the shale gas revolution and thermal coal suddenly didn’t have a home in American power plants. A slow domestic economy has put the brakes on manufacturing in the United States, which currently has a PMI of 49.5, reflecting a contraction.

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Weak GDP growth in the U.S. compounded the coal industry’s problems, cutting demand for metallurgical coal and iron ore, and forcing companies to adopt tough cost-cutting measures. Tremendous drops in earnings are reflected in the decline of stock prices. For example, shares of James River Coal were down nearly 55 percent in 2012 on earnings of -$2.60 per share.

In the face of these and other problems, coal companies turned their eyes overseas to large, rapidly-industrializing economies like India and China. But China’s average PMI for the past 12 months has been just 49.1, according to HSBC, once again reflecting a contraction. Economic growth in China was relatively slow in 2012, at just 7.5 percent GDP growth compared to 9.5 percent GDP growth in 2011.

Between the sluggish global economy and increased competitive and regulatory pressure in the U.S., coal stocks didn’t stand a chance in 2012 — but data suggests that 2013 could reverse the downward trend…

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