China’s weakness weighed on metallurgical coal and Walter Energy
Crude steel production
Because metallurgical coal is primarily used to produce steel, world crude steel production is a key driver of metallurgical coal demand and prices. This, in turn, affects the VanEck Vectors Coal ETF (KOL) and coal companies such as Peabody Energy (BTU), Arch Coal (ACI), Walter Energy (WLT), and Consol Energy (CNX).
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Improvements in Europe
During the first quarter, Europe and other Asian (ex-China) countries saw improved steel production growth. In Europe, steel production rose almost 7.0%. According to Walter Energy (WLT), steel production in Germany rose a little over 4% on the back of a strong automotive market. Spain and Italy both grew almost 10%. Walter Energy noted that while “there are some concerns over political and economic instability in parts of Europe, the region is off to a good start this year.”
China is still key
Still, as the chart below shows, China makes up more than half of the world’s steel production and has been a major source of growth over the last four years. Throughout 2013, crude steel production growth in China hovered around high single digits and lower double digits. But during the first quarter of 2014, crude steel production growth fell to just below 5.0% on pollution concerns and the government’s continuous efforts to rein in excess debt in the economy in a move to start focusing on economic sustainability and profitability. Car sales were negatively affected by restricted license issuance, while real the estate market cooled, given tighter liquidity conditions.
We won’t get into the specifics here, but investors can get a sense of China’s economic conditions by looking at key indicators such as real estate sales, car sales, manufacturing PMI, money supply growth, and industrial output. Of course, it’s also important to read up on the government’s words for clues on their policies. These indicators will be available on our coal industry page soon.
So what is Walter Energy doing in this tough market? Find out in the next part of this series.