Arch Coal Inc (ACI): Will Coal Companies Recover in 2013?

Shares of leading coal mining companies have tumbled down in the last several months: Shares of Arch Coal Inc (NYSE:ACI) plummeted by 26.5%. Do these companies have a silver lining? Will they recover from their tumble in the coming months? Lets’ examine the latest developments in the coal industry and try to determine if coal companies are likely to rally in 2013.

Will production rise in 2013?

In the first four months of 2013 the total U.S production was only 319 million short tons. In comparison, during the same time frame in 2012 the total production was 344 million. This represents a 7.2% drop in production (y-o-y). The Energy Information Administrations still estimates coal production will pick up in the coming months. Based on its current estimate, the U.S production will reach a total of 1.026 billion of short tons in 2013, which is nearly 1% higher than the production in 2012. But the drop in production in the first few months of 2013 was also reflected in the performance of leading coal mining companies: In the first quarter of 2013, Arch Coal Inc (NYSE:ACI) sold 34.1 million of tons compared with 36.1 million of tons in the first quarter 2012 – a 5.5% drop; Cloud Peak Energy Inc. (NYSE:CLD) sold in 21.3 million of tons Q1 2013 compared with 22.9 million of tons in the same quarter in 2012, which represents a 7% decline (y-o-y). If the EIA will come through with its projections this could mean these companies will see a sharp rise in revenues as the year will progress.

Moreover, despite the drop in production these two companies still project their production will pick up and perhaps even reach the same production levels recorded in 2012: Arch Coal Inc (NYSE:ACI) sold in 2012 140.7 million of tons; the company expects to sell between 133 and 144 million of tons in 2013. Cloud Peak Energy Inc. (NYSE:CLD) sold in 2012 nearly 93 million tons. In 2013, it expects to sell between 88 and 92 million of tons.

Prices are falling

Another issue that steered away investors from these stocks is the drop in prices in the first quarter of 2013: the average realized price of coal for Cloud Peak Energy declined by 1.6% (y-o-y); the realized price of coal for Arch Coal Inc (NYSE:ACI) tumbled down by 15.8%. Moreover, the cost of production for Cloud Peak Energy Inc. (NYSE:CLD) increased by 6%. These factors led to the sharp fall in the profitability of these companies in the first quarter of 2013. Cloud Peak’s operating profit reached 10.2% in the first quarter 2013 compared with 12.6% in the same time frame of 2012. Meanwhile, Arch Coal Inc (NYSE:ACI) turned an operating loss in the first quarter.

Even if production will pick up in the coming months, the main concern will be the price of coal that might continue to fall in 2013. Two closely related factors, among many, are likely to affect the price of coal: the price of natural gas and the price of electricity.