United States Steel Corporation (NYSE:X) steeling itself for an uncertain future, Peabody Energy Corporation (NYSE:BTU)
Digging for coal is not as profitable as it was at one point of time and most coal companies are finding themselves unable to surface from the mine of the fading coal demand. Some optimistic investors prefer to believe that the significant rise in natural gas prices will have a positive impact on the demand for coal. However, it doesn’t look like that is going to happen anytime soon. Governments across the world have been imposing stringent pollution-control measures on coal power plants.
China’s purchase-management index reading has shown distinct signs of contraction in manufacturing. The economy is snail-paced which will result in a dip in demand for electricity. 79 percent of electricity in China is fuelled by coal and the demand may have to bear a further hit. Though there has been a rebound in natural gas prices over the past 12 months, from a statistical point of view, the price has been almost stagnant since 2009.
It is likely that companies such as United States Steel Corporation (NYSE:X) will trade at much lower prices as it doesn’t seem like their investment prospectus is safe. The steel industry is a major coal customer. Weakening in coal demands also indicates a weakening steel demand. Very recently, the company missed analysts’ estimates as it posted a net loss of $73M in the Q1, which was narrower than the $219M net loss that had been posted in 2012. The reduced demand for steel has the potential to hurt X’s revenues. Till the point that the demand for coal and steel stays low, United States Steel Corporation does not really seem like it has a very attractive investment prospectus,
The Peabody story
Peabody Energy Corporation (NYSE:BTU) on the other hand, has moved from high-cost mining regions to much lower-cost coal mines, and the coal demand will not let up the pressure on its revenues. The one advantage that the company has is that the increased free cash flow is sure to help investors breathe easy with reference to the safety factor of it 1.8% dividend offer. The Illinois basin coal contains over 1% sulfur and is the range that the Chinese government is contemplating on banning. The outcome of this ban will impact both United States Steel Corporation (NYSE:X) and Peabody Energy Corporation (NYSE:BTU), either directly or indirectly.