Historically high coal prices might be weakening

CHARLESTON, W.Va. — Global demand for coal has shown some signs of slack, leaving investors to wonder what's next for U.S. producers who have seen prices at times triple over the past year.

Ocean freight rates, the U.S. dollar and other factors behind the big jump have begun to ease. Meanwhile, analysts are questioning whether a global slowdown has begun to hurt the steel industry, which uses high-priced metallurgical coal to fire blast furnaces.

Investment bank Goldman Sachs downgraded the entire U.S. steel industry Thursday, citing risks such as the strengthening dollar and concerns about demand from China.

Shares in one of the biggest coal producers, Massey Energy Co., tumbled nearly 8 percent, or $4.37, to $51.40 Thursday on news that 2008 prices and production are showing signs of weakness.

St. Louis-based coal giant Peabody Energy offered a more bullish assessment during a presentation at a Lehman Brothers investor conference Thursday. Peabody, the world's largest privately held coal producer, said world coal demand continues to exceed supply and prices remain strong and rising. Massey is scheduled to present at the same conference Thursday afternoon.

Massey Chief Executive Don Blankenship said much the same thing: Prices for metallurgical ("met") coal remain strong as demand continues to exceed supply. "Despite some of the more recent publications, we find it to be extremely tight." So tight, Blankenship said, that Massey has sold 7 million tons at an average price of $173 for 2009 and 2010 delivery.

"We will see coal prices in the $220 to $250 range," he said. "It could be higher. It will depend to a great extent again on what the Australians are doing and what the Chinese are doing."

While steam coal has slipped a bit — Central Appalachian coal for electric power plants closed at $105, down from $143 in July — Blankenship noted that the price remains historically high.

Stifel, Nicolaus & Co. analyst Paul Forward blamed lower volumes of metallurgical coal for lukewarm 2008 price and production guidance issued by Richmond, Va.-based Massey in a report Thursday. Met coal has soared to $250 a ton at times this summer, from less than $100 a ton a year ago. As Forward notes, Massey's stock has fallen about 40 percent in the third quarter after jumping 157 percent in the second quarter.