For the next 6 months, stocks in the coal industry will most likely meander around current levels until investors get a better sense of the health of the global economy. The status of the housing, credit and job markets will directly and indirectly dictate the medium-term outlook for coal miners and the commodity.

The problems associated with the deterioration of the U.S. economy have trickled through the rest of the world, and what have been particularly worrisome are the effects on China and India. In recent years, these two countries have been experiencing rapid growth and their consumption of coal has followed suit, giving support to global prices. However, as exports make up roughly 40% of China's GDP, the global slowdown has decreased China's demand for electricity, iron ore and coking coal. This has put downward pressure on coal prices and producers alike.

While we have a medium- to long-term positive view and the high quality players in the coal space, we realize that, in the short term, a catalyst that will move equity prices has yet to be seen. Therefore until there is concrete evidence on the health of the housing market, unemployment rate or the effect of China's stimulus package heading into the second half of 2009 and into 2010, clarity remains absent.

International: China's $586 billion stimulus package, expected to be utilized over the next 24 months, will support growth in infrastructure, housing and personal income levels. On the supply side, bottlenecks are still an issue as ports at major exporting nations won't see additional capacity until 2010. Lastly, the problems pervading credit markets will force producers to rethink or cancel additional Brownfield/Greenfield projects further constraining supply.

Domestic: The inelastic nature of electricity usage will help thermal coal pries as consumption is expected to be flat and production is likely to shrink 2% in 2009 due to announced producer curtailments.

Currently, the U.S. is undergoing the largest coal fired power plant build-out in nearly 3 decades. This will translate into roughly 65 MM tons of annual coal demand by 2012. This will particularly benefit producers who have meaning production from the Power River Basin, like Peabody Energy Corporation (BTU) and Arch Coal, Inc. (ACI), as 50% of this new coal fired demand will use PRB coal. Lastly, strict environmental regulation and labor problems have led to an increase in mine closings which have decreased eastern power plant supplies.

With declining costs of materials and fuel, operating expenses should experience a decreasing trend throughout 2009. This will help offset weakness in the spot market. While the likelihood of large acquisitions is off the table due to the current credit environment, companies with a strong balance sheet and cash on hand have the opportunity to pick up smaller, bolt on acquisitions as asset prices have depreciated over recent months.

Assumptions for 2009:
Thermal Coal Prices: $75 - $85 per ton
Metallurgical Prices: $150 - $185 per ton