Coal's Problems Not Cyclical – Wilbur Ross (KOL) (CNX) (ACI)

July 16, 2012 8:15 AM EDT
Billionaire Wilbur Ross said that the coal industry's current slump may last for years because of problems created by the shale-gas boom and low natural gas prices. Last year Ross sold his coal assets for $3.4 billion. His timing couldn't have been better.

Last year there was a shortage of 8 million tons, but that trend has flipped and there is a global oversupply of 2 million tons, and this signals production cuts in the industry, according to a note by analysts at the Bank of America Merrill Lynch today.

Futures contracts for Appalachian thermal coal have dropped 13 percent this year on the New York Mercantile Exchange. They closed at $56.28 a ton on June 11, the lowest in more than two years.

The EIA is forecasting U.S. use of coal for electricity will fall 9 percent this year and domestic producers will cut 97 million tons of output.

So far this year, Consol Energy Inc (NYSE: CNX), Canada's Cline Mining Corp., and St. Louis-based Arch Coal Inc. (NYSE: ACI) announced U.S. closures representing 5.8 million tons of annual production.

"Last time the cycle was this bad, the problems were essentially just cyclical," Ross recently said in an email. "This time the major secular trends are far more likely to be unfavorable for years to come."

Just today, analysts at BMO Capital downgraded both Alpha Natural Resources, Inc. (NYSE: ANR) and Arch Coal Inc. (NYSE: ACI) to underperform citing potential "financing issues" due to weak balance sheets and margins.

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