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Can you benefit from the depressed coal market?

The case for coal might be strong in the long term, but there are certainly strong headwinds facing the sector currently. Wesfarmers Ltd (ASX: WES) has become the latest corporation to admit the difficulties within the market, having told the ASX on Tuesday that coking coal from its Curragh mine in Queensland would sell for around 16% less in the June quarter than in the March quarter.

The price for thermal coal, which is used to generate energy, has been on a steady decline for a number of years now. In fact, since January 2011, it has nearly halved in price to now be sitting in the low US$70 a tonne range. Metallurgical coal, a key steelmaking ingredient, has also been on a downwards trajectory and was selling for around US$105 a tonne in the March quarter, compared to US$300 a tonne in 2011. It is feared that it could fall below US$100 a tonne within the coming months.

Most players within the industry have expressed their optimism for the long-term demand of coal. For instance, Rio Tinto Limited’s (ASX: RIO) head of energy said: “Australians should recognise that coal will remain an important energy source for decades.” Although it is not the cleanest energy source, it is one of the most affordable which should see demand from countries like China and India remain strong for decades to come.

However, pessimism for the near-term is just as widespread. Dean Dalla Valle, the energy boss at mining giant BHP Billiton Limited (ASX: BHP), recently said: “The long-term fundamentals for the products are there but, at the moment, we have short-term overhangs of supply, so the industry will have to shake itself out, as it will one way or the other.” He added that, “it is hard to see any relief in the short term.

Given that BHP, Rio Tinto and Wesfarmers all derive the majority of their earnings from other sources, they are in a good position to weather the storm until conditions start to improve. However, other companies which maintain a heavier focus on coal, such as WHITEHAVEN COAL LIMITED (ASX: WHC) and New Hope Corporation Limited (ASX: NHC), will need to continue cutting costs and improving productivity to cope. Since January 2011, their share prices have dropped by 80% and 40%, respectively.

Foolish takeaway

Coal will remain an in-demand energy source for decades to come, and investors could certainly benefit by investing in the miners that produce it. However, given the pessimistic near-term outlook, you would be wise to remain on the sidelines until prices fall even further, or until there are (much) clearer signs of a recovery.

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Motley Fool contributor Ryan Newman has a financial interest in New Hope Corporation, owning shares in Washington H. Soul Pattinson and Co.

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