Coal – thermal and metallurgical – has been beaten badly in the last year but some signs are emerging that the worst maybe behind and that some stability and perhaps a small return of demand in thermal coal maybe ahead.

The price difference between natural gas and thermal coal as well as appreciating Euro may have placed a floor under this dirty energy input.

For thermal coal, there are two distinct markets – one in the US and another elsewhere.

In the US, the thermal coal is a trade-off with natural gas. Demand for such coal goes down as the price of natural gas falls.

For the past year, electric utilities have been dumping coal, not just because of regulatory pressure, but also because natural gas was too abundant and cheap. As a result, share of coal in electricity production plunged while nat gas rose.

For example, in 2011 natural gas held 22.3% of the electricity generation for the first half, but by 2012 nat-gas is at 30.4%, a virtual tie with coal.

BNP Paribas says that economics of coal prices for 2013 look favorable but not sufficient to meaningfully change the balance against natural gas.

But this also means that coal will stop hemorrhaging and that some stability in the US maybe ahead of us. This, of course, may mean that some badly beaten coal names with thermal exposure, like ANR and BTU, may have already bottomed.

ANR, for example, is cutting some thermal jobs but it is also rebalancing its business with more focus on exports.

“On the thermal side of the equation, we have been focused on the U.S. markets in the past. (We are) trying to scale up our platform as rapidly as possible to participate in global markets,” says ANR CEO Kevin Crutchfield.

Crutchfield says that thermal coal business in the US is shrinking and globally he sees a rise by 2 billion tons over the next 10 to 20 years, a long time perspective that provides only marginally small gains per year.

Meanwhile, the QE3 may be in impetus for a more thermal coal firming on the global markets. China and India are seen as growing users but some also see Europe switching out of natural gas in favor of coal.

Europe does not have the shale-gas revolution like we do in the US so the switch is more of a function of the exchange rate rather than nat-gas price.

With the falling dollar against the Euro some see a pickup in thermal coal buying out of Europe because more profit could be gotten for the utilities. For example, at the Euro exchange rate of $1.60 German utilities profit at 16.25 Euros per megawatt delivery while on the bottom end, $0.93 they lose only 6.97 Euros.

Analysts see Euro trading between 1.40 and 1.20, plenty of space for these utilities to generate profit.

On the metallurgical coal side, however, things are not so rosy as Chinese steel mills keep dumping steel and curtailing production.

As a result, the price of met-coal has plunged from high $200 per ton in 2011 to about $160 with Japanese steel makers settling at this price with Australian miners.

“We do not suspect the current price structure can persist for too long. The benchmark number being talked about out of Pacific Rim is untenable for the producers on a sustainable basis,” says ANR’s Crutchfield.

Analysts see more pain for US coal names, particularly those that heavily invested in the metallurgical coal, a report points.

“If metallurgical coal averages less than $200 next year and thermal doesn’t ‘explode to the upside,’ then producers including Alpha, Peabody, Arch and Walter won’t generate positive free cash flow,” Bloomberg is paraphrasing Mark Levin, an analyst at BB&T Capital Markets in Richmond.

Met-coal is already down 34% over the past 12 months and Levin thinks that it is “hard for us to imagine them getting much worse”.

In the past, it was noted on this blog that names like Walter, when it traded in the $60s could fall into $30s or even lower.

Mid-August, however, we pointed some bullish technical developments with Alpha (ANR) which needed some confirmation.

ANR is attempting to bounce off its July low of $5.75 but a confirmation that this low is rejected would require the stock to perhaps break through $7.50. Today’s price action where ANR bounced off the $5.88 strongly suggests that attempts at the bounce are being made but the confirmation that it is rejected is not in.

Bloomberg says that “Peabody, Alpha and Arch all reported negative free cash flow in the second quarter, meaning they didn’t generate enough cash to run their businesses” but these all defend their recent buyouts of met-coal names saying that the debt they incurred is worth it in the long run.

Alpha, for one, believes that the market is not pricing the future correctly.

“Our fundamental conviction is that the world is structurally undersupplied of high-quality metallurgical coal for the foreseeable future,” Alpha CEO says.

This belief is currently put to the test by the markets as Alpha is still far from clearing the bounce off its July lows.

Coal has been beaten up nasty for some time now and names like Alpha Natural Resources (ANR) and Peabody Energy (BTU) trading for a price of lottery ticket in comparison to what the shares swapped hands less then 2 years ago.

It is never a good idea to be brave to catch a falling knife but with the price of coal looking more like a bounce off the bottom rather then a dive ANR and BTU show some technicals that may confirm that bottom and perhaps even signal that a rally in these names maybe ahead.

ANR, for example, has clocked a stronger momentum measure on the MACD chart in late July when it hit $5-handle then in early June when the shares swapped for $8-handle. Similar situation is with BTU: the MACD measure was lower at $23 but higher at $19.

This a price-momentum divergence, a situation when the stock price records lower lows but the momentum-trend measure MACD records a higher low, is considered bullish by chartists and there are many examples which show that a resulting outcome of such divergence is a higher stock price once the selling is exhausted.

On the fundamental side, coal is despised not just by the politicians on the left but also by the market which sees cheap natural gas as an energy substitute for many coal-based industrial endeavors, including steel where coking coal is the main ingredient. Steel maker Nucor, for example, is spending $750 million on a new Mississippi plant that will run on shale gas thus bypassing coking coal (whose price can also be unstable depending on what kind of weather occurs in Australia).

Both ANR and BTU have invested heavily into coking coal with some, including BTU, claiming in past years that ahead maybe a super cycle. Doubtful – as China is grappling with its own slowdown hurting steel while Europe has admitted that it harbors an over capacity in steel, a thing that will get remedied by sharp cuts.

With bullish technicals and a near uniformly negative outlook on coal some folks are dipping their cash into various names.

ANR, for example, could conceivably go into high $9s to complete a cup formation but at this stage the price pattern looks more like a bear flag – meaning that lot more clearance (monitoring) is needed to improve the odds on which way to go on coal.

Yesterday, Wilbur Ross was on the talking circuit giving quotes to Bloomberg and making a stop at CNBCs Fast Money show – and in both instances he was expressing gloom about coal.

“Last time the cycle was this bad, the problems were essentially just cyclical. This time the major secular trends are far more likely to be unfavorable for years to come,” Wilbur told Bloomberg.

Wilbur’s comments on coal come about a year after he sold his coal mining compendium called International Coal Group for $14.60 per share to Arch Coal (ACI). Back then, ACI was trading at about $32 per share with a market cap of, roughly, $6.8 billion so the $3.4 billion purchase of Wilbur’s enterprise stitch was about 58% of the value of the company.

Today, at $5 and change, ACI is valued at $1.3 billion and with debt of about $4.1 billion ACI sports negative net worth.

At the time of the sale, Wilbur was considered, at least by New York Times, as the “Coal Alchemist” while coal outfits, like ACI and others proclaimed a multi-decade coal super cycle, particularly focused on coking coal claiming that China and BRICs have an infinite appetite for that. As it has turned out, it looks like Wilbur simply sold the coal to the greatest fool.

Judging by the question Fast Money’s Najarian posed to Wilbur, the legacy of a belief in coking coal’s invincibility still persists although the price of those stocks, particularly of Walter Energy (WLT), are not corresponding with that belief.

Walter Energy has dipped into $30s recently and based on predictions made on this blog back in May when WLT was trading in high $50s, the price target discussed then – a cliff-dive into $30s – is largely approaching. Some of those shorts should be covered so that, as Cramer puts it, we could play with the house money on the next leg down.

Based on a weekly chart above, WLT looks ready to dip down in towards $11 per share.

The fundamental side confirms this technical call. There is glut of steel and Chinese are dumping it while steel mills in the US are increasingly moving towards using natural gas in steel production.

WLT is not much of an exporter to China so any reactivation of Chinese industrial complex would not benefit WLT much. On the other hand, domestic shift towards nat-gas, in the aggregate, will inflict a longer term dent on WLT as mills shift more and more away from coking coal.

Last year, around this time, WLT was rumored to be for sale for up to $200 per share and yesterday Wilbur was talking about a possibility that some of these coal names may have hard time finding financing.

WLT, like ACI, is already into negative equity: market cap is at $2.3 and debt is at $2.4 billion so all we need is a seizure on the revenue side and suddenly, like Patriot Coal, the $200 per share would look like…