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The Coal Rally: Real or a Head Fake?

The Coal Rally: the Real Thing or a Head Fake? By Steve Doyle/BtuBaron LLC (August 26, 2016) One of my pet peeves is headlines like these that lure the ‘clicker’ into the illusion that the accompanying article will answer the posed question. It was once the domain of tabloids, but the line between tabloids and ‘old school’ respectable newspapers has been blurred beyond recognition. It was once used by fluff magazines (How to know if he’s cheating on you …; Six-pack abs in six minutes per day …), but virtually every mainstream periodical (hard or digital) uses the same strategy. Regrettably, the mainstream financial online websites (CNBC, Bloomberg) have gone down the path. Many of you are reading this because you know me and are familiar with who I am at my core. I share what I believe only after I have researched the issue at hand and applied my experience, intelligence and intuition. The rest of you are in for a treat because this is not fluff and while no one can provide a definitive answer to the article’s question, I will provide you with my definitive opinion. Even though I remain in the ‘no man’s zone’ of my non-competition clause that came with the sale of my former company (Doyle Trading Consultants LLC), I continue to monitor more than seventy data points that I believe determine the coal sector’s direction. Depending which set of data points is ringing the bear or bull bell, a change in any particular data point could be monumental or could be completely irrelevant depending on the context. For me, successfully analyzing the coal sector entails as much art as it does science. I think we can agree that a mini-rally in the thermal and coking coal sectors has been underway since Q2: • Coal Equities: Although many of the big US coal coalcos (Peabody, Alpha, Arch & Walter) have declared bankruptcy and are no longer publicly-traded, most of the survivors have seen significant +40% YTD gains with some doubling. Regrettably, they are light years from where they once were, but the rebound is unfolding. The summer of 2016 was not the time to apply the ‘Sell in May and Stay Away’ strategy for the coal equities. The coal space had bigtime gains between May 31st and September 1st. • Coking Coal Prices: Coking coal started the year with the Jan-Mar benchmark for Australian premium coking coal at US$81/MT and earlier this week at spot cargo for Oct shipment traded at US$139.50/MT and the market on Wednesday Aug 31st was US$150 bid/US$168 offered. This price rally has surprised everyone. While it might not be indicative of where the next quarterly benchmark (Oct-Dec) will settle, it could certainly settle more than $20/MT higher than the US$92.50/MT for the Jul-Sep quarter. • Global Thermal Coal Prices: In the Atlantic and Pacific basin markets, global thermal coal has seen +30% gains YTD throughout the curve. In the Pacific Basin, semi-soft coking coal’s standard 80% discount to premium coking coal results in US$120/MT based on current spot prices. The gap between the prevailing US$68/MT for standard Newcastle thermal coal and the theoretical US$120/MT for semi-soft will presumably incentivize Australian coalcos to divert thermal coal into the semi-soft market, which could tighten thermal coal supply and push prices higher. • US Thermal Coal Prices: In the US thermal market, the YTD gains have been more modest – PRB up 5% spot; up 11% for 2017; Capp rail up 19% spot; up 17% 2017; Napp & ILB down about 3% spot; down 8% 2017. But even in the US, we have seen improving fundamentals with the huge inventories dropping swiftly in response to the hot summer and natgas in the +$3 range for Dec-Mar (and drilling activity at near-record lows). If natgas prices manage to hold in the +$3 range, the US utility demand could easily rebound by 50 – 70 mm tons in 2017 (enabling coal prices to regain some lost ground). [To read the full article, please click on the tab]