Around Shanghai, about 24,000 businesses are expected to face mandatory power cuts this summer, and the government is encouraging shops and offices to close when temperatures reach 98.5 degrees F.

The government has not allowed utilities to raise rates, fearing that to do so would stoke the country’s inflation fires. The country’s five largest utilities posted an aggregate loss of about $1.62 billion in the first
four months of the year, largely blaming high coal costs.

There appears to be a fundamental disconnect brewing here. On one hand, Chinese utilities aren’t buying a lot of coal because of high prices and government-enforced price limits. On the other hand, coal miners like Peabody, with a significant presence in Australia, are expected to ship more coal at higher prices to China.

Patriot Coal and Consol, which sell primarily to US utilities, could reap the benefit that Goldman sees coming in the second half of this year. It is just as likely, however, that Patriot is a takeover target. It’s market cap has dropped below $2 billion and its forward P/E ratio is just over 7.0.

Arguing against a takeover is the recent burst of acquisition in the sector, which doesn’t leave a lot of suitors for Patriot.

Patriot is up more than 3% at about noon today, to $19.65, within a 52-week range of $9.76-$29.20. Peabody is up nearly 1%, to $54.38, in a 52-week range of $38.08-$73.95, and Consol is up about 0.3%, to $45.98, in a 52-week range of $31.08-$56.32. The Market Vectors Coal ETF (NYSE: KOL) is up marginally at $44.44, in a 52-week range of $28.99-$51.87.

Walter Energy is down about -2%, at $105.86, within a 52-week range of $57.62-$143.76. Teck is down about -2%, to $43.83, in a 52-week range of $28.37-$65.37.

Paul Ausick