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Has coal dug itself out of a deep hole?

David Russell (david.russell@optionmonster.com)

Yesterday may have marked a turning point for coal stocks.

Buyers came out early in the group after China reported blow-out trade numbers, including an 18 percent spike in coal imports. Miners shot higher across the board, along with producers of iron ore and copper.

Coal companies merit scrutiny now because this industry group is trading at deeply distressed values following years of weak demand from China and growing stockpiles in the United States. Recent reports from the Energy Department suggest that business will start to improve, creating the opportunities for potentially huge rebounds.

"Demand for coal was higher and supply was lower in first-half 2013," the agency said in a July 26 report . Spot prices didn't recover right away because utilities burned through their inventories of coal, and international prices remained weak.

Electrical generators are expected to keep using up their big stockpiles in coming months, but the key point is that the mountains of unused fuel are being diminished. At the same time, production has been at the absolute bottom of long-term trends.

All of this points toward stability and a potential recovery. Also consider that exports have more than doubled since 2007 and imports have fallen by more than 75 percent. That means it's more dependent on international buyers such as China and Europe--both of which have shown strong manufacturing data in the last two weeks.

Most of these companies trade for much less than book value with significant short interest, and the bears were clearly betting on bankruptcy in many cases. But yesterday's China numbers suggest that the tide may have turned and the danger has passed. (See our proprietary researchLAB tool for more on the industry.)



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