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Arch Coal takes another beating

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World Coal,

The recovery of shares of Arch Coal a few months back were completely erased in the last month as the company lost over 30% of its value and a total of 50% in the past two. Even if the company does report a better than expected quarterly earnings report next month (for the last quarter of 2014) it's not likely to have much of a positive impact on the valuation of the company.

The news about the EPA's proposed Clean Power Plan has already resulted in Arch Coal's management voicing its concern over this plan's potential harsh impact on the coal industry.

On a yearly scale, the company still expects its total coal sales volume to remain around 133 million t - roughly 4% lower than 2013. For 2015, the company expects around 22% slash in its coal production compared to 2014. This outlook was back in late October. The recent plunge in coal prices, the low natural gas prices and the EPA's recent plan could result in a further slash in this company's 2015 output.

It's no surprise that the coal market remains soft and isn't likely to see much of recovery anytime soon. The main question is whether coal companies could further cut down their production costs and adjust their business in times when coal prices dwindle.

The latest short term outlook of the Energy Information Administration showed that the current expectations are for lower coal output in 2015 and 2016, albeit production picked up by 1% in 2014. Most of the drop in coal yield is expected to be in Appalachian coal - a projected fall of 3.6% in output in 2015, year on year. Western region coal output is projected to remain flat this year.

Nonetheless, coal consumption is projected to edge up by 0.3% in 2015 after remaining nearly unchanged in 2014. The implementation of the Mercury and Air Toxics Standards, however, is expected to reduce coal consumption in 2016. So for 2015, coal may have made a short term comeback. Alas, the decision of the EPA to ramp up its regulatory oversight could result in the consumption to actually be lower than previously estimated. Also, the current low natural gas prices are also reducing the demand for coal.

In the past few days the price of natural gas picked up, but it's still relatively low for the season. If natural gas prices were to remain lower than average, this could result in higher demand for this commodity in the power sector.

The recent developments in the energy market including falling natural gas and oil prices may have also contributed to the tumble in coal prices, which are currently around US$48 - over 20% lower than their levels in the middle of 2014.

If the energy market were to remain soft in the coming months, this may also keep the coal market in even more dire terms than it is already.

Does Arch Coal have a sliver lining?

Over the long run it's hard to find one. But over the next few quarters, market developments such as a turnaround in natural gas prices or if the EPA doesn't implement its recent plan will drive higher demand for coal. These factors could bring back up this coal company's stock. Another issue to consider is exports. In 2015 coal exports from the U.S., by the company's own account, are expected to keep falling. China, the leading importer of coal, is growing at a slower pace. It also plans to cut down its carbon emissions. But over the coming years, if the country's economic outlook changes, this could change the coal market and bring back up Arch Coal. These scenarios, while plausible, remain out of reach for Arch Coal.

Source: Seeking Alpha by Lior Cohen

Edited from source by Joe Green

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