The Whitehaven Coal Ltd (ASX: WHC) share price hit a 52-week low of $5.38 yesterday, and it's down 23% in the last 12 months, as the chart below shows. This large valuation decline begs the question of whether it's a cyclical opportunity or if it's a falling knife stock.

What's a falling knife? It's a share that's dropping in value, and it'd be dangerous to try to catch/buy it because it's likely to cause further losses for investors.

Just because something has fallen doesn't mean it won't keep falling. For example, the share price of a weakening business may have dropped from $10 to $2 – a fall of 80%. If someone decided to invest at $2 and it dropped to $1 (not too surprising), it'd represent a fall of 50% for that brave investor who tried to catch a knife.

Let's put ASX coal share Whitehaven under the microscope.

Falling coal price

A significant problem for the coal producer is the falling coal price. In the three months to December 2024, the average price achieved on sales of produced coal was A$226 per tonne, down from A$238 in the three months to September 2024 (and the average price was also A$238 in the three months to June 2024).

Production costs don't change much every three months, so a fall in the commodity price significantly reduces profitability because it still costs the same to produce 1mt of the commodity, but they're getting less revenue for it (and noticeably less profit).

While the coal price has declined, Whitehaven said demand from its main customer markets (particularly Japan) remained "robust", though there has been a short-term oversupply of high calorific value (CV) thermal (energy) coal in a tight market.

Can the coal prices recover?

Whitehaven is confident on the long-term price of both energy/thermal coal and steelmaking/metallurgical coal. It said in January:

Over the longer term, the expected structural shortfall in global metallurgical coal production, particularly the long-term depletion of HCC from Australian producers combined with increased seaborne demand from India, is anticipated to drive higher metallurgical coal prices. Whitehaven's metallurgical coal portfolio is expected to benefit from these supply constrained market dynamics.

Demand for Whitehaven's Queensland metallurgical coal remained strong during the December quarter, while market conditions for steel production were soft and metallurgical coal prices were flat.

The rebound in Indian demand for metallurgical coal has been slower than expected, in part due to the availability of cheap Chinese steel exports ahead of Chinese domestic consumption lifting, but we remain confident in India's underlying growth.

Expected continued demand for seaborne high CV thermal coal together with a structural supply shortfall due to underinvestment in new mines and depletion of existing supply, is expected to be supportive of longer-term prices for high CV thermal coal.

…Upcoming peak winter conditions in northern Asia are expected to support thermal pricing as coal inventories are drawn down and restocking occurs.

Is the Whitehaven share price a buy?

The business is due to hand in its FY25 first-half result on 20 February 2025, so there's not long to wait to see if it can regain investor excitement.

If coal prices stabilise, then I'd imagine the Whitehaven share price won't keep dropping. But, for a significant recovery, it could require a rise in the coal price.

UBS currently rates Whitehaven as a buy, with a price target of $9.40, implying a large rise from where it is today.

However, with other energy sources replacing coal over time (renewables and possibly nuclear), I wouldn't suggest Whitehaven shares as an ultra-long-term investment, though its exposure to steelmaking coal is a useful diversification of earnings.