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How China Led to Walter Energy’s Fall

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Jul. 20 2015, Updated 10:06 a.m. ET

Slowing China

China’s National Bureau of Statistics recently released its 2Q15 GDP growth figures on July 14. The Chinese economy grew at 7% in 2Q15, higher than analyst expectations of 6.9%. However, the growth rate is much lower than the 9.7% GDP it enjoyed in 1Q11 when coal prices peaked.

However, analysts are questioning the numbers put up by the Chinese authorities because they feel that such growth is not visible in the ground-level activity and other economic indicators. China’s industrial production, which grew by around 15% in 1Q11, grew by only 6.8% in 2Q15. China’s manufacturing Purchasing Manager’s Index (or PMI) is down to 50.2 in 2Q15 from 53.4 in 1Q11. A PMI above 50 indicates expansion while that below 50 indicates contraction.

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Steel industry

A bigger worry for met coal producers is the state of Chinese steel industry. For years, China has been the biggest importer and consumer of metallurgical coal. However, Chinese steel industry is battling a slowdown amid a glut in the market.

China’s steel industry PMI has dropped to 37.4 in June 2015 from 60 in January 2011. China’s steel production has grown by just 1.3% in first six months of 2015 over the same period last year.

Met coal prices

As we discussed earlier, benchmark met coal prices have fallen from $330 a ton in 1Q11 to just $93 a ton in the current quarter. At this price, met coal producers (KOL) across the globe, including Alpha Natural Resources (ANR), Arch Coal (ACI), Rio Tinto (RIO), and Peabody Energy (BTU), are struggling.

The American met coal producers are having the toughest time due to locational issues and the weaker Australian dollar. A weaker Australian dollar puts Australian met coal producers at an advantage because coal exports are priced in US dollars while these producers’ costs are in Australian dollars.

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