An interesting twist last week as Citigroup issued a bearish report on coal stocks. (See excerpt, below.) Citigroup wasn’t the only analyst to downgrade coal last week; so did HSBC Global Research. http://news.tradingcharts.com/futures/2/9/95769592.html
Citigroup’s analysis was a warning signal from Wall Street that the coal industry needs to shape up – and find uses in advanced clean-coal technologies – or face the consequences, as politicians look to solutions for global warming. It also could be a sign that concern about global warming isn’t going away.
(St. Louis-based Arch Coal, the nation’s second biggest coal producer, reports second quarter earnings on Monday. Citigroup downgraded Arch from “buy” to “hold.”)
Interestingly enough, Citi has come under sharp criticism for underwriting conventional coal-burning power plants. http://www.boston.com/news/nation/washington/articles/2007/01/16/banks_are_urged_not_to_finance_coal_power/?page=2
(Yes, we know there’s a needed firewall between the analysts and the financier arms of the company.)
Even so, doesn’t this make those within Citi who finance coal look a little out of step?
Some of the most interesting language from the report (our emphasis added):
We are downgrading Coal stocks across the board. After maintaining a positive view on Coal thus far into 2007, we are growing more concerned that datapoints are failing to translate into utility stockpile drawdown as NatGas has taken further share in power generation. At the same time, prophesies of a new wave of Coal-fired generation have vaporized, while clean Coal technologies such as IGCC with carbon capture and Coal-to-Liquids remain a decade away, or more.
Stubbornly high stockpiles defer the "day of reckoning" into 2008 Our sense is that Coal has missed a critical time window, which potentially throws any recovery out-of-phase, with implications that could last for a year or more. If stockpiles remain elevated into autumn, they are likely to remain so, thus perpetuating the contract/pricing standoff with the utilities into 2008 – at which point election politics are likely to turn progressively more bestial for Coal. Candidates are already stepping up to "ban Coal," while company productivity/margins are likely to be structurally impaired by new regulatory mandates applied to a group perceived as landscape-disfiguring global warming bad-guys. We expect Coal prices to rise, but for earnings to falter.