Peabody Energy Corporation (BTU), Arch Coal Inc (ACI), BHP Billiton Limited (ADR) (BHP): The Major Headwind for These Companies

China’s PMI continues to contract, which means a slowdown in the manufacturing activities in the country. One of the sectors that may be impacted significantly is the coal sector. Although the Market Vectors Coal ETF has declined 29% on a year-to-date basis, I believe the downside is not over. Hence, investors should steer away from coal companies.

Beware of the coal

Peabody Energy Corporation (NYSE:BTU) trades with a negative P/E. The company posted a decline of 10% in revenue to $1.7 billion in the previous quarter and a net loss of $23 million, down from a net income of $173 million a year ago. Further, its cash from operations declined $120 million to $272 million.

Overall, the company has not been profitable lately. Further, I believe that its revenue will continue to decline. China’s total coal demand tumbled in 2012 for the first time in the past decade by 32 MT, hit by slower economic growth and a surge in hydro power.

Analysts expect that Chinese domestic coal will capture a bigger share of the thermal coal market due to improving railroad and ports conditions. Hence, they forecast that coal imported to China “will fall by some 35 MT.”

The aftermath of dimming demand for coal has severely impacted the commodity prices, and Peabody Energy Corporation (NYSE:BTU) may see its revenue decline since it is an exporter to China. Investors need to look for improving manufacturing activity in China in order to reconsider investing in Peabody Energy Corporation (NYSE:BTU).

Arch Coal Inc (NYSE:ACI) is the second largest coal producer in the United States. The company posted a decline in revenue of 21% to $826 million in the last quarter compared to the year-ago period. Further, the company ended the quarter with a net loss of $70 million compared to a profit of $1 million a year ago.

Its cash from current operations fell $12 million to $43 million. Its free cash outflow at the end of the period was $20 million, compared to $47 million last year. Analysts rate the stock a 4.0 on a 5-point scale where 5 is buy and 1 is sell.

The company’s subsidiary, Asia-Pacific Pte. Ltd., established operations in Beijing to increase the footprint in the region. However, the coal surplus in China will prove difficult for Arch Coal Inc (NYSE:ACI) to export the product to the country. In fact, investors may expect a continuous decline in coal exports as long as China’s manufacturing activity remains weak.