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Stock Strategist Industry Reports

Buyers Beware: Black Cloud Looms Over Coal

A rash of dealmaking is usually a contrary indicator for commodity prices.

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Our universe of coal stocks has come down between 10% and 20% since we last discussed these names back in March. Oil and natural gas prices have come off of their rallies induced by the Japan disaster and Arab revolt, a deflation which spilled over into coal prices. Plus, demand in the United States has been weak, a situation that higher export volumes couldn't overcome. However, this short-term blip hasn't dented coal companies' enthusiasm. Uniformly, industry management has been very bullish on the long-term prospects for coal prices, with the term "super cycle" brandished on more than one occasion.

At least one company recently has put its money where its mouth is:  Arch Coal (ACI) paid $3.4 billion to acquire  International Coal (ICO) in early May. International Coal was one of the last sizable independent Central Appalachian miners, and its former management team previously had worked for Arch. This continues a strong pattern of consolidation in the coal industry. The previous mega-deal was when  Alpha Natural Resources (ANR) snapped up  Massey Energy (MEE) in late January. Both in the U.S. and internationally, several deals have been consummated in recent months, mostly targeting metallurgical coal. Another example is Walter Energy's (WLT) $3.3 billion purchase of Western Coal in December 2010.

Michael Tian does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.