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Coal Producers To Ride Demand Growth

A positive demand outlook from Asia and deepening supply constraints will support coal prices through 2010. Tickers: WLT JRCC BTU CNX ANR

NEW YORK (TheStreet) -- Coal prices are expected to heat up during 2010 on the back of strong demand growth in China, India and Indonesia. Moreover, supply constraints may steepen as several mines in Australia and South Africa experience transport problems and clogging coal infrastructure.

We anticipate stocks of U.S. coal producers will recover from their recent selloffs and generate gains during 2010 as fundamentals of the industry remain strong. The selloff of coal stocks related to the European debt crisis and China economic growth during the past month are overdone.

James River Coal



Walter Energy



our coal stock-picks

, likely will witness a strong rebound in their stock prices, which have declined 9.4% and 11% over the past month.

James River and Walter Energy are trading at attractive enterprise value to earnings before interest taxes and depreciation multiples of 4.1 and 3.0 respectively, over

Peabody Energy's

(BTU) - Get Peabody Energy Corporation Report


Consol Energy's

(CNX) - Get CNX Resources Corporation Report

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4.6, and

Alpha Natural Resources'



China will continue to lead global coal demand and overall imports are likely to surge to new highs, surpassing Japan as the world's largest coal buyer. China's net coal imports during the first four months reached 50 million tons, or an annualized 154 million tons. In 2009, China imported 125.8 million tons of coal.

China's domestic production has ramped up to reach 1.01 billion tons during the first four months of 2010, up 27.7% from the prior year. The country's largest power producer,

Huaneng Power International

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, produced 40% more electricity during the first quarter of 2010, relative to 2009.

Although India is the world's third largest producer of coal, domestic supplies and transportation networks are yet to keep pace with the high demand growth. India will continue to rely on imports to plug the supply-demand gap as the new power projects are largely coal-based. For instance,

Tata Power

, a Tata group company, is looking for a strategic stake in the Indonesian or South African coal mines for its upcoming thermal power project in India. The project requires 6 million to 8 million tons of coal to fuel the 2x800MW plant and management targets to acquire a stake that will assure 8 million to 9 million tons of coal supply.

Indonesia, the world's leading coal producer with an annual capacity of 250 million tons, is expected to curb exports as domestic demand has increased on the government's target to boost electricity capacity by 15,000 MW by 2014. Exports will register only a 20% increase during the upcoming years, in comparison with the staggering 80% during the past five years.

South Africa's coal exports will tighten because of infrastructure constraints during 2010, despite the resolution of a rail strike. However, relief is expected during 2011 as rail capacity is set to augment to 80 million tons per year from the current 66 million tons with the delivery of 100 new diesel electric locomotives in early 2011. In addition, South Africa's domestic consumption will also peak as the country grapples to meet power consumption during the month-long FIFA World Cup beginning Friday.

Australia's congested coal transport systems, particularly rail lines, will hamper coal exports, despite the recent expansion in port capacity. In New South Wales, Port Warath Coal Services shipped 93 million tons in 2009, and the recent expansion will upgrade the capacity to 113 million tons per annum in 2010. However, we foresee only a marginal increase in overall coal shipments during 2010, weighed down by rail line issues.

Australia, Indonesia and South Africa together account for more than half of the world coal exports. Constraints in these traditional coal markets imply that the Asian demand outlets will tap Colombia, Russia and the U.S. for coal supplies.