Saying that coal company management has focused on the right levers — lengthening debt maturities, slashing discretionary capital spending, reducing marginal production, driving productivity and cost performance — Sterne Agee this morning said it expects an increase of 40 million tons in shipments of thermal coal in 2013, compared with 2012 shipments. The outlook for metallurgical (met) coal was lowered by 20 million tons.

Demand for thermal coal, which is used primarily to generate electricity, is expected to rise 6% to 7% in 2013, with further gains of 2% in 2014. Shipments are forecast to total 60 million to 70 million tons this year, up from a previous forecast of 20 million to 25 million tons.

Demand for met coal used in steel making is expected to slip from a previous estimate of 115 million tons to 95 million, rising to 105 million tons in 2014. Sterne Agee lowered its pricing expectations for met coal in 2013 from $190 a ton to $165 a ton and its 2014 pricing forecast from $225 a ton to $195.

Sterne Agee’s top picks among the large coal stocks are Arch Coal Inc. (NYSE: ACI), Consol Energy Inc. (NYSE: CNX) and Peabody Energy Corp. (NYSE: BTU). Its mid-cap pick is Alpha Natural Resources Inc. (NYSE: ANR) and its small-cap choice is James River Coal Co. (NASDAQ: JRCC). All are rated as Buy. Walter Energy Inc. (NYSE: WLT) is rated Neutral. The the analyst notes that risks include low electricity generation growth, below $3.00 natural gas prices, metallic destocking on a global level, a stronger U.S. dollar and further regulatory actions targeted to restrict U.S. coal consumption and production.

Arch Coal trades this morning at around $4.10, in a 52-week range of $3.98 to $8.86. The consensus price target from Thomson Reuters is around $6.50.

Consol Energy trades at near $32.00, in a 52-week range of $26.41 to $37.39. The consensus price target is around $42.00.

Peabody trades at around $16.80, in a 52-week range of $16.43 to $29.84. The consensus price target is around $27.85.

Alpha Natural Resources trades around $5.70, in a 52-week range of $5.28 to $10.74. The consensus price target is around $9.90.

James River trades around $2.10, in a 52-week range of $1.46 to $5.89. The consensus price target is around $2.65.

Walter Energy trades at around $12.10, in a 52-week range of $11.16 to $48.99. The consensus price target is around $26.60.

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