Commodities & Metals

Commodities Watch: Why Coal Is Back In Favor With Goldman Sachs (PCX, BTU, CNX, WLT, TCK, KOL)

A Goldman Sachs analyst has raised the coal sector from ‘Neutral’ to ‘Attractive’ this morning. The big gainer was Patriot Coal Corp. (NYSE: PCX) which was raised from ‘neutral’ to Goldman’s Conviction Buy List. Peabody Energy Corp. (NYSE: BTU) was raised from ‘neutral’ to ‘buy’, and Consol Energy Inc. (NYSE: CNX) was raised from ‘sell’ to ‘neutral.’ One stock was downgraded as well: Walter Energy Inc. (NYSE: WLT) was lowered from ‘buy’ to neutral’.

Goldman’s reading on the entire sector is that thermal coal, used to generate electricity and heat, would outperform metallurgical coal used in steel making. As if to underscore that point, Canada’s Teck Resources Inc. (NYSE: TCK) lowered its production guidance for the second quarter, citing higher costs and deferred shipments due to the Japanese earthquake and tsunami. Teck is among the world’s largest suppliers of the metallurgical (coking) coal used in steel making.

Teck expects unit mining costs  of $71-$76/metric ton in 2011. The company also lowered its estimated average selling price for metallurgical coal from $280-$290/metric ton to $270.

Goldman’s prediction for thermal coal is based on better demand from both China and the US as US exports rise and lower production in the US bring inventories down by the end of the year. US utilities signing contracts for 2012 are expected to be forced to pay more to guarantee supply.

The situation in China is more complicated. The country has been unable to produce enough electricity for months now, as continued drought has lowered river levels and reduced hydro-power generation.

Already high coal prices pose another problem because the government sets the rate at which utilities can sell electricity, and right now the government is more concerned about consumers than about utilities. Thus, it has forbidden utilities to raise rates and opted instead to ration power where it can.

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