Why investors worship Old King Coal

Times staff writer Edward Silver filed this report on the burgeoning bull market in the coal sector:

Coal producers are riding high for an industry that a growing throng of Americans wish would just go away.

Year to date, shares of Arch Coal Inc. are up 41%. The biggie of the industry, Peabody Energy Corp., has waxed 24% -- and 94% from its August trough. A broader measure of the sector's stocks, the Market Vectors Coal exchange-traded fund, has advanced 26% since its January launch.

All this bullishness is based on the dark rock’s own surge in value. Benchmark prices for some grades of electricity-generating steam coal are more than $100 for a metric ton, double September’s price. Metallurgical coal, the type used in steel making, has tripled in some contracts.

Oil attracts the anger and the ink, but coal, mined here in the U.S., has joined the club of rudimentary resources blessed by the energy crisis.

What we are paying up for is the dirtiest fossil fuel in the ground, infamous for wielding a heavy hand in the planet’s warming. In Beijing they wear surgical masks to ward off the soot from coal-fired plants, which drifts across the Pacific to further foul the air over Los Angeles. That’s not all. Black lung disease, mercury and sulfur emissions and the ravaging of Appalachian mountaintops are part of the legacy that keeps our lights on.

Coal provides about half the electricity in the United States, though not in California, where natural gas, another fossil fuel, claims a larger share. Nuclear power contributes 20% of the U.S. power total. Hydroelectric has a small role, while solar and wind -- sorry, environmentalists -- thus far account for less than 1% of the total. These wannabes are doing everything they can, including stalking the halls of Congress, to outmaneuver the out-of-favor incumbent.

Coal’s edge, though, is that it’s still the low bidder when it comes to costs, despite the recent run-up in prices. Also, everything needed to radiate coal-fired power all over the map already is in place, not only the generating stations but storage, transit and integration with the grid. On both accounts, solar and wind have plenty of work to do.

Naturally, few Americans want to see a coal plant built in their backyard. In many cases, politicians want them far away too. Kansas Gov. Kathleen Sebelius, a Democrat, made news when she vetoed two power plants to spare her state 11 million tons of additional carbon dioxide emissions annually. Calls for legislation to bill emitters for their carbon-burning privileges are gaining traction. Even Sen. John McCain of Arizona, the presumed Republican presidential nominee, is on board. Likewise, interest is rising in hoped-for technological fixes, including a complex blueprint known as carbon capture and sequestration.

With so much resistance, coal plant construction has ebbed in the U.S. Be prepared for brownouts.

"Utilities know there will be some kind of legislation and a carbon-capture mandate, but there are no requirements yet or price tag associated with carbon," said Ann Kohler, an energy analyst with Caris & Co. "Regulators are looking at natural gas, renewables, nuclear. There are a lot of unknowns. Utilities that have started construction are moving forward, but otherwise, plans are on hold" for new coal-burning plants.

There are no such misgivings or hold-ups in nations that are in a hurry to catch up with the West. China and India have especially voracious appetites for coal’s cheap energy, and the supply deficit may persist for years. This winter, that imbalance suddenly became an emergency, partly the effect of Australian floods and Chinese blizzards that shut down mines. Charging into the breach, U.S. coal exporters are finding famished markets, happy to make hay on prices driven skyward by scarcity. The anemic dollar is a bonus for their bottom lines.

Fossil fuel investors, rejoice. But what an opportunity for renewables! Yet solar, wind and other renewables aren’t nearly ready to dethrone Old King Coal, particularly overseas. In fact, if green alternatives do eventually curtail coal’s dominion in the U.S., it’s not hard to imagine the industry thriving on the tobacco model: ostracized at home, welcomed around the world.

As for the stocks, Kohler rates Massey Energy Co. a buy for its concentration in metallurgical coal, the sweet spot of the market. She expects earnings per share to expand from $1.17 last year to $3.05 this year and $4.13 next year. Alpha Natural Resources Inc. and Walter Industries Inc. also are well-positioned in metallurgical coal.

Peabody’s shares, meanwhile, now may be too rich to risk money on, Kohler said, based on past valuation ratios.

The whole group, however, won’t for long be enjoying these lofty prices for their output, Kohler believes, and that may inject volatility into their financial results. Mining is recovering in Asia, and prices per ton are likely to settle back to elevated but not aberrant levels. Any shortages in China tied to this week’s destructive earthquake are expected to be short-lived. Furthermore, Kohler foresees a rebound in the dollar.

Although today the market for the grimy mineral is ablaze, change is coming, so keep your eye on these canaries in the mine: Prices could ease along with the supply crunch. Emitting CO2 may get expensive, likewise the technology to capture it. Consumers are unhappy about their electric bills and foul air, and the political class wants to try out a host of new regulations. Cleaner alternatives are clamoring for their chance.

But for now, coal miners are doing business like there’s no tomorrow.

Photo: A coal mine in Trevorton, Pa./Associated Press

Iron ore over bacon burgers: It's no contest on Wall Street

The tale of two markets continues: It’s a lousy time to own shares in many companies directly reliant on the U.S. consumer (even Jack in the Box is having trouble selling burgers, for Pete's sake). But if you have a stake in an iron ore mine -- or in a shipping company that hauls the stuff to China -- life has never been better.

Shares of iron miner Cleveland-Cliffs Inc. surged 3.9% to a record $190.99 today amid continuing optimism that the appetite for iron and steel abroad, particularly in Asia, will remain robust. The massive earthquake in China this week may just stoke demand as rebuilding begins.

Also hitting a record high was U.S. Steel, which jumped 2.7% to $176.61. That helped push the CRX index of 20 commodity-related stocks to a new high as well.

And yet another index at a record today: the so-called Baltic Dry index, which measures global shipping rates for raw materials. It rose nearly 4% to 11,067, topping the previous peak set Nov. 13. That boosted shipping stocks including Genco Shipping & Trading, which closed above $82 for the first time and is up 50% year to date.

Bloomberg has a good explainer on what’s driving shipping rates (story is here), but it comes down to this: There aren’t enough boats afloat to easily meet demand.

All of which throws more cold sea water on the idea of an imminent global recession -- despite the ongoing punk reports on the U.S. economy. The Federal Reserve today said industrial production slid 0.7% last month, twice as much as analysts expected.

For the U.S. manufacturing sector overall, "The strength in exports is not enough on its own to offset the weakening of domestic demand," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

But if you have what China and other developing countries really need, you’re in clover. As for the stocks of companies fortunate to be in that position, however, even commodity-market bulls have to admit the charts look frighteningly frothy at the moment.

Beijing signals it has seen enough stock-market misery

Times Staff Writer Don Lee filed this report from Shanghai on Thursday:

Is China's great bear market over?

That's what investors are wondering after the central government on Wednesday cut its stock transaction tax to 0.1% from 0.3%. The long-awaited move rolls back the so-called stamp tax to the rate it was a year earlier, when Beijing raised the surcharge to cool what was then a heady market.

Wednesday's reversal was aimed at arresting a stock market in freefall: The Shanghai market’s benchmark composite index had plunged nearly 50% from its peak in October to last Friday’s closing level.

The tax rollback was officially announced after markets closed Wednesday, but investors apparently got wind of the impending action earlier in the day. Although the tax wasn’t onerous in the market’s heyday last year, the move to pare it helped boost depressed investor psychology. The Shanghai index jumped 4.2% on Wednesday. And today the index was up 7.3% in mid-day trading, to about 3,517.

The tax cut came on the heels of a separate government measure on Sunday to limit sales of large blocks of shares to off-market transactions. Taken together, the two steps reflect Beijing's concern that the risk of social turmoil was growing because of the market’s plunge.

Millions of ordinary Chinese jumped into the stock market in the last couple of years with wide-eye expectations of raking in big profits. But since fall Chinese stocks have been tumbling, a reflection of rising inflation, a tightening of credit and, most significantly, a flood of once-non-tradable shares into the market after a ban on those sales was voided by government.

Beijing has always had a heavy hand in China’s stock markets. And the latest one-two punch is likely to boost investors’ confidence, creating what some believe could be a nice government-planned run-up leading to the Olympics in August.

"I believe this was a signal given by the government that the market should not drop below 3,000," said Kevin Dai, 27, a Shanghai investor. The Shanghai index had briefly dipped below 3,000 on Tuesday -- from a record high of 6,092 in mid-October -- before closing up 1% that day.

Dai says he won't be rushing to plow more money into stocks just yet. "I want to wait and see," said the clerk at a trading company, who has lost about $43,000 in recent months, leaving him with about $85,000 in his stock portfolio.

Posted April 23, 2008

A study in pain: The Chinese stock market

China’s stock markets were closed for a holiday on Friday, and many Chinese investors may be thankful: That was one less trading session in which to lose money.

As the nation’s stock bubble continues to deflate there are more calls for the government to take action. But it isn’t clear what authorities could do, even if they were willing.

China’s once red-hot markets have been among the world’s worst performers this year. The Shanghai composite index is down 34.5% year to date and down 43% from its all-time high reached in October.

U.S. investors in the iShares FTSE/Xinhua China-25 exchange traded fund haven't fared quite as bad. The fund, which is supposed to track the performance of the 25 largest Chinese stocks, is down 33% from its October peak.

Still, the losses in Chinese stocks make the slump in the U.S. market look amateurish by comparison. The U.S. Standard & Poor’s 500 index is down 12.5% from its October record high.

China’s experience is a classic unraveling of a speculative frenzy. The Shanghai index rocketed from 1,000 in mid-2005 to cross 6,000 in October, drawing in millions of investors and speculators along the way.

But prices fell sharply in November amid a global stock sell-off fueled by worries over the U.S. credit crunch. Despite a rally in early January the market was never able to regain its previous momentum.

And since mid-January selling has beget more selling: The Shanghai market has fallen in 11 of the last 12 weeks. Now, investors want the central government to do something to stop the pain.

On the front page of Monday’s Shanghai Daily, Premier Wen Jiabao sought to reassure investors, saying the government would take efforts to promote the "stable and sound development" of the stock market. But he didn’t give any specifics, says Times Staff Writer Don Lee in Shanghai.

In the past, such pronouncements by top officials often were enough to trigger market rallies. Not this time. The Shanghai index plunged a total of 7% Monday and Tuesday, before recovering about half that loss on Wednesday and Thursday.

One gesture the government could take would be to lower the so-called stamp tax, a small transaction fee that investors pay every time they buy or sell shares. Officials raised the tax last year when the market was soaring. But cutting the tax might be viewed as more symbolic than substantive.

Beyond that, Beijing doesn’t appear to have many options. Many analysts believe the government can't open the money spigot because the nation is trying to beat back rising inflation, particularly in food products.

What’s more, the stock market’s fundamentals aren’t too encouraging, Lee reports. Shares still are pricey compared with many other markets around the globe. Many Shanghai stocks sell for 30 to 35 times annual earnings per share.

And this at a time when profits are sliding for Chinese companies, as raw-materials costs soar and the global economic slowdown takes its toll. China's export growth has decelerated markedly over the last year, says Carl Weinberg, economist at High Frequency Economics in Valhalla, N.Y. He thinks the slowdown in the first quarter was enough to cut gross domestic product growth to an annualized rate of 9% from 11.2% in the fourth quarter.

Single-digit growth for China? Weinberg believes that could be a real shocker for financial markets when the government reports first-quarter data on April 17.