United States Steel Corporation (X), SunCoke Energy Inc (SXC): Why China’s Declining PMI Index Should Worry You?

Further, if the free cash flow continues to decline, you should not expect the company to bring capital appreciation to your portfolio in the form of a dividend and/or share repurchase program. Thus, you should stay away from this company.

If the coke production companies are struggling, you should avoid coal miners, too.

Lower coke demand equals lower coal demand

For the three months ending June 30, 2013, its revenue declined from $1.9 billion to $1.7 billion. This resulted in a decline in net income to $90 million, or $0.39 per share, from $200 million, or $0.75 per share.

One of the issues that concern me is that China’s steel surplus is entering the Australian market. Therefore, the production of Australian steel is likely to decline. Therefore, the coal demand is weak and the prices for the commodity are declining substantially.

You may wonder what that has to do with Peabody Energy Corporation (NYSE:BTU). According to the earnings report, revenue per ton from the Australian sector was impacted the most in the quarter. Revenue per ton in the last quarter was $86.44, compared to $107.55 last year. In the United States, revenue per ton declined by $1 to $22.03.

This is a big deal for the company since almost half of its revenue comes from Australia. Therefore, if coal demand remains weak, especially in Australia, revenue is likely to continue shrinking. This will put pressure on the stock price. Therefore, you should consider reducing your position in Peabody Energy Corporation (NYSE:BTU) as soon as possible.

Final thoughts

China’s PMI index is declining and several sectors are suffering as a result. Therefore, you need to avoid exposure to the steel and coal sector. Right now, I would recommend you to stay away from United States Steel Corporation (NYSE:X), SunCoke Energy Inc (NYSE:SXC), and Peabody Energy Corporation (NYSE:BTU) because the steel surplus that China has is finding markets in Australia, Europe, and the U.S. Consequently, these companies may have issues selling their products in the local markets in the interim.

Robinson Roacho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Robinson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Why China’s Declining PMI Index Should Worry You? originally appeared on Fool.com is written by Robinson Roacho.

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