Must know: Why Arch Coal missed its estimates
Reduction in sales volume
Due to a challenging fourth quarter, Arch Coal, Inc. saw a reduction in coal sales volume across the board over the past quarter attributable to two causes. First, the previously disclosed weather and rail carrier shortfalls in the Powder River Basin that are expected to continue into the first quarter of 2014. A total of 2.5–3 million tons of coal was affected due to the service disruption. The management however expects to make this difference up in 2014. Second, the geological mining challenges that were faced at Mount Laurel located in Central Appalachia where mining height is thinner which led to the slowing of the long wall. Both of these factors contributed to their overall drop in sales volume for full year 2013 as compared to 2012. These issues are not expected to have much material effect going forward into 2014. In all, Arch’s cost cutting efforts were not enough to counter these issues and the weak coal market, and this ultimately led to lower operating margins across the board.
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Low coal prices
As with the entire coal industry, the weak lingering coal prices were the main reason for the losses this quarter. The average selling price per ton of coal across all their mines dropped sharply as compared to 2012, in particular the Appalachia region which had the biggest decrease in average price. The management team does however have a positive outlook for the near future.
“We believe that we’re currently in the heart of the adverse conditions now and we would expect improvement as we progress through this panel and transition to a new one in the second half of 2014.” —Paul Lang, COO
There are several factors that the management has highlighted during the earnings call that could point to a potential recovery in the coal market. First, U.S. coal stockpiles dropped more than 35 million tons in 2013 mainly due to colder weather. This, however, has worried some customers due to potential stockpile shortages if these trends were to continue. Plus, current elevated natural gas prices due to weather conditions are pushing for a switch back to thermal coal generated electricity.
Long story short, shortages in the coal stockpile and increasing natural gas prices both serve as a catalyst for the thermal coal market. With Arch’s position as a major player in the coal industry, the company is in a potentially strong position to capitalize on such an opportunity.
For more on decline in coal demands, see An increasingly difficult market for Arch Coal and its competitors.