After a challenging couple of years, coal demand and pricing are currently improving. Coal remains the fastest-growing source of fuel in most developing markets, led by China and India and their near-insatiable thirst for energy. And, despite plaudits to environmentally friendly sources of energy, the U.S. is unlikely to kick its fossil-fuel addiction anytime soon. The Value Line Investment Survey currently covers 10 stocks within the Coal Industry; eight coal producers and two makers of mining equipment used in the production process. A couple—Alliance Resource Partners (ARLP) and Penn Virginia Resources (PVR)—offer stellar yields, which may appeal to income-minded investors. By and large, however, coal equities are selected for their long-term appreciation potential, since the Industry’s prospects are so closely tied to worldwide economic activity.

Coal stocks are cyclical by nature, with share-price run-ups during periods of economic expansion, typically followed by falling values as markets inevitably contract. Coal accounts for roughly 40% of the electricity generated worldwide, while almost 80% of the power produced in China and India. Moreover, nearly half of this country’s usage is coal fired. Down the home stretch of 2010, and into 2011, we think an increase in global coal demand is likely, though supply may be constrained for the near term due to weather- and infrastructure-related bottlenecks.

Over the long haul, demand will increasingly come, in all likelihood, from the world’s three largest coal consumers: China, India, and the United States. Although several Administrations have pledged support for renewable sources of energy, the U.S. still has a voracious appetite for fossil fuels, such as coal. But unlike its brethren, coal is a home-grown product; about one-quarter of the world’s known coal reserves are on U.S. soil, and the industry currently employs north of 170,000 Americans, making it more politically palatable than oil. Although some posit solar, wind, and nuclear power as threats to coal’s long-term status within U.S. energy policy, the industry can snap back with the promise—whether real or a panacea—of `clean coal’ just around the corner.

Meanwhile, the Pacific Rim’s two 800-pound gorillas have developed a taste for coal, and show no signs of curbing their appetites. Together, China and India represent nearly half of worldwide coal consumption, and may approach 60% over the next 15 to 20 years. Thanks in part to its proximity to these fast-growing markets, Australia is now the world’s largest exporter of coal. Peabody Energy (BTU), through a series of acquisitions culminating with the purchase of Australia’s Excel Coal in October of 2006, has built on its position as the world’s largest private-sector coal company. Wary of losing ground in this all-important market, we expect Peabody’s rivals—including Arch Coal (ACI), Alpha Natural Resources (ANR), CONSOL Energy (CNX), and Massey Energy (MEE)—to follow its lead and make a big push down under in the years ahead.  

None of the stocks that comprise Value Line’s Coal Industry stand out for short-term relative price performance, and the group, as a whole, is expected to trail the broader market according to our Timeliness Ranking System. However, investors with a long-term view will likely find something of interest in this sector, since many of the Industry’s coal producing stocks hold substantial appreciation potential over the next 3 to 5 years. Namely, Arch Coal, Alpha Natural, CONSOL Energy, Massey Energy, and Peabody, all feature well above average capital-gains potential out to 2013-2015, the one caveat being that none of them offers a dividend of note. Among the equipment makers, both Bucyrus International (BUCY) and Joy Global (JOYG) offer worthwhile upside potential, with the former being the standout of the two. As for those accounts stressing current income, Alliance Resource and Penn Virginia feature excellent payouts, and in both cases, decent appreciation potential only sweetens the pot.