China's coal stocks SinoCoking Coal ( SCOK) and Yanzhou Coal Mining ( YZC), may witness short-term weakness as the government has directed mainland producers to maintain stable prices on inflation concerns. Over the past month, James River Coal has gained 18% while Walter Energy has lost 11%. In comparison, the S&P 500 index declined 4% during this period. The outlook for U.S. coal stocks is bullish, especially after the 20% jump in natural gas prices during the past month and a half. Any further upsides in natural gas prices may compel U.S. power producers to opt for coal. "At $5, no utilities are going to burn gas when they can burn coal," Meredith Bandy, analyst at BMO Capital, told Bloomberg. Patriot Coal ( PCX) which declined 25% during the past month, now looks attractive trading at a price to earnings ratio of 11.68. BMO Capital recently rated the stock an outperformer with a price target of $24, implying a 100% upside from current levels. The producer, located in the Eastern United States, benefits from easy access to power plants and the ability to switch between coal and gas. According to the U.S. Energy Department, about 45% of the country's electricity will be generated from coal and 22% from gas power utilities. "Utility inventories are higher than normal but I don't think we're in an oversupplied market," Pearce Hammond, analyst at Simmons & Co. told Bloomberg. "With natural gas at these prices, coal should jump in front of gas," he added. On the other hand, the near-term outlook on China coal stocks is weak. The Chinese government has directed coal producers to maintain price stability on inflationary concerns. This renders the companies' future margins uncertain. "This amounts to a cap on coal prices and this has affected sentiment for coal stocks," Michelle Leung, an analyst at CIMB-GK Securities, told Bloomberg. "Coal companies are still making good profits, but there's no indication as to how long they may have to cap prices which raises concerns about future margins," she added.
China's coal imports during May declined 19% month on month to 11 million tons.