Must-know: State of the US metallurgical coal industry



U.S. metallurgical coal industry

Metallurgical coal is used to make coke for iron and steel as well as foundries. The majority of metallurgical coal produced in the U.S. is exported. In fact, metallurgical coal dominates overall U.S. coal exports. In 1Q14, the U.S. exported 28 million short tons of coal. Of this, 17 million shorts tons—or 60%—was metallurgical coal.

Metallurgical coal exports have grown especially since 2007, when supply constraints in the Pacific market resulted in fast-growing Asian countries, notably China, importing metallurgical coal from the U.S. U.S. exports to China grew from just 12 thousand short tons in 2007 to 10.6 million short tons in 2012.

Coal exports

Slowing demand

However, demand from China is slowing for multiple reasons. These include rising production in Australia and slowing economic growth. China imported 3.9 million tons of coal from the U.S. in 1Q13. In the first quarter, imports fell to just 781 thousand tons.

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As you saw earlier, the majority of the metallurgical coal exported by the U.S. went to Asian countries in the past. With rising production levels in Australia, Asian countries find it more cost-effective to import from Australia than from the U.S. The prices reached as high as $330 per ton in 2011 due to shortages on account of floods in Australia.

With the current state of oversupply, prices have fallen as low as $100–$120 per ton. The lower prices and lower demand from Asia have resulted in a difficult time for U.S. metallurgical coal producers (KOL) like Alpha Natural Resources (ANR), Arch Coal (ACI), and Walter Energy (WLT).

While Peabody Energy (BTU) doesn’t have any metallurgical coal assets in the U.S., its Australian operations are hampered by lower metallurgical coal prices. This part of the series is rendered from 2Q14 earnings update for Arch Coal, Assessing Arch Coal’s 2Q14 earnings and cost-saving measures. In the next part of the series, we’ll talk about revenue and cost performance of the company.


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