Arch Coal Held in Balance - Analyst Blog

On Jun 6, we have issued an updated research report on Arch Coal Inc. ACI. The coal operator stands to benefit from the improving thermal coal market in the U.S. Just as natural gas prices continue to rise, customers are likely to switch to coal leading to a decline in coal stockpiles. As per the Energy Information Administration, coal consumption is estimated to increase by 5% in 2014 backed by rising power demand in the U.S.

However, recent pro-environment proposals from the Obama administration calls for a 30% cutback in carbon emissions by 2030 from coal-fired power plants from 2005 levels. If the latest climate-change action plans are implemented without any downward revision in emission slab, it will increase compliance costs for the coal-fired plants. This might impact coal demand and prove unfavorable for Arch Coal's future prospects.

Arch Coal, a Zacks Rank #3 (Hold) stock, reported a wider-than-expected loss in the first quarter 2014, mainly due to softness in the metallurgical (met) coal market and rail congestion issues in the Powder River Basin.

Meanwhile, rising infrastructure investments in India and China as well as a buoyant U.S. auto market will drive steel market fundamentals. The World Steel Association estimates steel production to rise by 3.1% in 2014. This will steadily increase global met coal demand and present an encouraging opportunity for coal export for Arch Coal.

Arch Coal's cost-containment efforts are also appreciable. The ramp up in the longwall Leer Mine in Appalachia as well as progress in the Mount Laurel mine will allow the company to enjoy higher production at lower cost.

Nonetheless, stiff competition from prime-coal exporting countries like Australia and Indonesia are potential headwinds.

Key Picks from the Sector

Other better-ranked coal players include Zacks Ranked #1 (Strong Buy) Alliance Holdings GP, LP AHGP and Alliance Resource Partners LP ARLP. Another coal stock that warrant a look is CONSOL Energy Inc. CNX, which currently holds a Zacks Rank #2 (Buy).