U.S. metallurgical coal industry
Metallurgical coal is used to make coke for iron and steel. Most of the 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 short tons—or 60%—was metallurgical coal. China forms the majority of the imports 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.
However, demand from China is slowing for many reasons—including production in nearby Australia and slowing economic growth. China imported 3.9 million tons of coal from the U.S. in 1Q13. In 1Q14, imports fell to just 781 thousand tons. With the current state of oversupply, prices have fallen as low as $100–$130 per ton.
China is also going to impose a 3% tariff on anthracite and metallurgical coal. The tariff will start on October 15. This will be negative for U.S. metallurgical coal producers (KOL) like Alpha Natural Resources (ANR), Arch Coal (ACI), Cliffs Natural Resources (CLF), and Walter Energy (WLT). To learn more about coal and coal types, please visit our Coal page.
Impact on Cliffs
Cliffs’ cost—including depreciation and amortization for the coal division—was $99 per ton in 2Q14. This excludes selling, general, and administrative expense (or SG&A) and freight costs. The cost and the realized revenue per ton of $73 pushed the sales margin to -$26 per ton.
Cliffs’ management is also looking for buyers for its coal business. However, given such low prices, the company may not be able to realize the best value for its assets. The company isn’t even shutting down its loss-making mines. It’s searching for a suitable buyer.
It reversed its decision to idle the Pinnacle coal mine. The Pinnacle coal mine forms part of the North American coal division that operates four metallurgical operations in West Virginia and Alabama. It has one thermal coal mine in West Virginia. The reversal will “facilitate unlocking the value of assets.” This means that keeping the mine operational is desirable if it’s going to be sold off.
As a result, Cliffs is in a difficult situation. Whether it chooses to run the loss-making mines or idle them, neither choice is desirable.