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How Coal Prices Could Affect U.S. Steel and Other Producers

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Coal prices

As discussed in the previous article, higher coal prices have been a key driver of steel prices over the last couple of months. While steel producers should benefit from higher steel prices, some steelmakers could see spikes in their input costs.

We’ve already seen a rise in U.S. Steel Corporation’s (X) unit production costs, as can be seen in the graph above.

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Coal contracts

During its 3Q16 earnings call, U.S. Steel said that it had annual coal requirements of 6.5 million–7.0 million tons in US operations and ~2.0 million tons in European operations.

Following its 3Q16 earnings release, the company said that some of its coal contracts “involve both supply and price certainty that extend beyond the current year.” This statement basically means that these contracts may not be affected by a large spike in coal prices. However, the company didn’t provide information on what percentage of its annual coal contracts falls under these fixed contracts.

ArcelorMittal

According to ArcelorMittal (MT), it uses about 35.0 million metric tons of coking coal annually. Of this amount, only 6.0 million–7.0 million metric tons come from its captive mines. The company buys 5.0 million metric tons of coking coal under annual contracts in the United States. The remaining 24.0 million metric tons are almost evenly distributed between spot and quarterly pricing.

During its 3Q16 earnings call, AK Steel (AKS) tried to allay some of the fears related to higher coking coal prices. Jaime Vasquez, the company’s CFO (chief financial officer), said that the company started negotiations for its coking coal contracts early. He also added that higher coking coal prices are “not a major concern at this point.”

We should note that minimills such as Nucor (NUE) and Steel Dynamics (STLD) aren’t affected much by rising coal prices, as they use electricity as a raw material.

Nonetheless, as steelmakers see spikes in their unit costs next year, steel prices should also find support. US steel prices could continue their upward momentum in the near term.

In the next article, we’ll explore how the narrowing spreads between US and international steel prices are supporting US steel prices.

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