Outlook Remains Negative for Vale’s Coal Business


Mar. 19 2015, Published 2:35 p.m. ET

Production down

Vale S.A.’s (VALE) coal production amounted to 8.6 million tons in 2014. This is 0.1 million tons lower than in 2013 and despite record production at Moatize of 4.9 million tons in 2014.

The decrease in production was mainly a result of declining performance of Carborough Downs (or CD) and the stoppage of the Integra and Isaac Plains coal mines that were put into care and maintenance in 2Q14 and 3Q14, respectively.

To read more about Vale’s coal operations, read Market Realist’s overview, Vale SA: The iron ore giant deconstructed.

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Profitability also down

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for the coal business was negative $669 million in 2014 against negative $455 million in 2013. The reduction of $214 million was mainly due to the weaker price environment in the industry.

Outlook still negative

According to Vale, total supply grew due to strong volumes from Australian mines. This was despite some shutdowns announced during the year and the slowdown of higher-cost producers. The drop in volumes from higher-cost producers was still mild. In spite of closing, these producers still had inventories to release, which kept prices steady at low levels.

Going forward, Vale expects coal prices to remain weak throughout 2015. The coal market is expected to remain oversupplied in 2015. The outlook thus remains negative for Vale.

Production cutbacks in North America and Australia will probably become more effective throughout the year. But despite these cutbacks, the decrease in volume will continue to be offset by new supply from new and expansion projects in Australia and Mozambique. This has led to weaker performance across coal companies, including Arch Coal (ACI), which lost 62%, Alpha Natural Resources (ANR), which dropped 77%, and Peabody Energy (BTU), which fell more than 60%. Even Cloud Peak Energy (CLD) lost half its value.

BTU forms 4.75% of the VanEck Vectors Coal ETF (KOL). The SPDR S&P Metals and Mining ETF (XME) also invests in this sector.


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