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Tickers in this Article: ACI, PCX, MEE, CNX, BTU, ANR, ASX:MCC.AX
Higher demand combined a tightened supply has ignited coal prices to record highs. Meanwhile, coal suppliers are quickly expanding their operations in order to take advantage of these bullish trends. Combined, this is great news for many companies operating in the coal sector.

The Coal Turnaround Story
Coal prices reversed in late 2007 after international supply problems and a weak dollar caused exports to jump 19% for the year, according to the U.S. Energy Information Administration. Some coal producers like Arch Coal (NYSE:ACI) are now predicting that global demand for coal will likely outstrip supply by 25-35 million metric tons this year. They also see this as a trend that will likely continue through 2010.

Meanwhile, strong international demand has been good for domestic coal producers and related industries. Some coal companies are estimating that U.S. coal imports could decline as much as 10 million metric tons this year amid supply disruptions and increased competition for coal from abroad. Obviously, a reduction in supply with equal or greater demand equates to higher prices. (For an in-depth discussion, check out Commodity Prices And Currency Movements.)

Early Earnings Set a Bullish Tone
Coal producers in the United States are looking forward to strong first-quarter earnings as the turnaround continues to send prices higher. The popular commodity's value has already doubled over the past year. For example the Northern Appalachia region has seen an increase from about $45 per short ton in April of 2007 to $105 in April of 2008 for certain types of coal. This increase is giving many firms substantial pricing power for future contracts going into 2009 and 2010.

How Is Arch Coal Doing?
Arch Coal is one of the largest coal producers in the United States. It posted earnings numbers that surpassed analyst expectations earlier this week. The company announced that its first quarter profit nearly tripled to $81 million amid strong global demand. Arch Coal also raised its full-year earnings forecast in a one-two punch that knocked out investor expectations.

Chairman and CEO Steven Leer added fuel to the fire when he hinted during a conference call that the electricity supply in the U.S. is headed toward a serious shortfall in two to three years unless more coal-fired power plants are built in the United States. These statements gave investors further confidence in coal's long-term prospects.

In fact, Arch Coal is so bullish on the coal prices going forward that it is leaving a portion of its 2008, and substantially more of its 2009, coal prices un-hedged. This will allow the company to continue to capitalize on continued pricing strength, particularly in metallurgical-quality coal and steam coal in the domestic markets.

Merger Mania Takes Hold
Strong opposition to new coal plants by environmentalists combined with increasing government regulation in the form of carbon credits has forced many coal companies to turn to M&A in order to expand their operations. This is another bullish signal for the market as companies are still seeing value in expanding even with the resistance.

Patriot Coal Corporation (NYSE:PCX) is one recent participant. The company has a large presence in the U.S. and recently agreed to purchase competitor Magnum Coal Company. The move will expand the company's presence in Central Appalachia with 600 million tons of proven or probable reserves in West Virginia.

"The transaction is expected to provide substantial commercial and operational synergies," said Patriot President and CEO, Richard Whiting in a press release. "It will create economies of scale, enhance our product line, grow our customer base, provide more transportation options, and accelerate our brokerage and trading activities."

Meanwhile, Australia's Macarthur Coal Limited (ASX:MCC) also announced that it received a takeover offer from a third party. The company supplies about 35% of the world's pulverized coal and would represent one of the largest coal acquisitions on record if approved. Shares in that stock moved up more than 17% earlier this week.

In the end, increasing earnings and bullish forecasts are music to investor ears, while an increase in M&A activity is a clear signal that many coal producers are confident in a continued bullish trend in the market. Companies and analysts are expecting coal prices to rise through 2010 until cooling off due to supply increases. Coal stocks benefiting from these trends include names like Arch Coal, Massey Energy (NYSE:MEE), Consol Energy (NYSE:CNX), Peabody Energy (NYSE:BTU) and Alpha Natural Resources (NYSE:ANR), which all closed near their all-time highs earlier this week.

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