Zacks Industry Outlook Highlights: Arch Coal, Walter Energy, Alpha Natural Resources and Patriot Coal

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Mar 17, 2011, 09:30 ET

CHICAGO, March 17, 2011 /PRNewswire/ -- Today, Zacks Equity Research discusses the Coal Industry, including Arch Coal (NYSE: ACI), Walter Energy (NYSE: WLT), Alpha Natural Resources (NYSE: ANR) and Patriot Coal (NYSE: PCX).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at http://www.zacks.com/stock/news/49167/Coal+Industry+Outlook+%96+March+2011

According to the EIA, 2011 coal consumption, coal production and utility coal stockpiles in the U.S. are projected to be essentially on par with 2010, due to the lower natural gas prices, which is a major substitute for coal.

Industry reports indicate that utilities are not expected to purchase significant amounts of coal for 2011 beyond what is already contracted for. Utilities that have indicated an interest in purchasing coal are doing so for delivery after 2011. Thus, the U.S. growth is projected to resume in 2012, with the increased consumption being matched with higher production, no way disrupting the utility coal stockpile balance.

Not only the U.S., but also the emerging markets will continue to demand thermal coal to power their growth, in our view. This will definitely improve the demand for coal in the power sector, despite all competition.

Rise in Steel Demand: Coal as a fuel source also contributes to the production of steel. The demand for metallurgical coal (coking coal), a key ingredient in the production of steel, has increased from 2009 levels based on the recovery of the global steel industry. The rise in demand for steel in China, followed by India, acted as a major driver for global demand and influenced the pricing for coking coal in 2010. This was also seconded by a recovering demand in the U.S. and Europe. The U.S. steel industry operated at about a 70% utilization rate in 2010 compared to a 40% utilization rate for most of 2009.

Metallurgical coal prices increased substantially in the first half of 2010 and stabilized in the second half of the year at prices approximately twice that of a year ago. Going forward, we see the prices for metallurgical coal to remain strong based on the overwhelming demand by steel makers across the world.

Starting from the latter part of December 2010 until recently, the coal industry experienced significant supply disruptions due to floods in Australia, Columbia and Venezuela, and rail issues in South Africa. These disruptions have had a significant impact on spot pricing of metallurgical coal and at this time it is difficult to gauge how long supplies are going to be curtailed and its impact it will have on metallurgical coal pricing.

Nonetheless, we believe this constrained supply of metallurgical coal is setting the stage for higher pricing in 2011. While the supply remains tight, we believe metallurgical coal producers in the U.S. can benefit from the increasing demand and high met coal prices. We would thus recommend investing in met coal companies like Arch Coal (NYSE: ACI), Walter Energy (NYSE: WLT), Alpha Natural Resources (NYSE: ANR) and Patriot Coal (NYSE: PCX).

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