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Why Analysts Expect Arch Coal’s Revenue to Fall in 4Q16

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Arch Coal’s revenue estimate

Arch Coal (ARCH) reported about $563 million in consolidated revenues for 4Q15. Analysts estimate that ARCH will report $548 million in 4Q16 revenues, which is nearly a 3% drop on a year-over-year basis.

The expected fall is primarily due to an anticipated decrease in coal shipments on account of lingering weakness in the thermal coal market across the regions in which the company operates. The company also made a planned reduction in coal sales in response to the market condition.

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Coal production

ARCH supplies coal primarily to major United States utilities and industrial users. According to the EIA’s (U.S. Energy Information Administration) weekly coal production data, coal production in all major US coal-producing (KOL) regions is estimated to fall in the second half of 4Q16.

Moreover, the total US coal production in 4Q16 is estimated to be about 1.5% lower than the coal production during a comparable period in 2015.

The fall in coal production may imply lower volumes for Arch Coal (ARCH) and its peers Cloud Peak Energy (CLD), Alliance Resource Partners (ARLP), Alpha Natural Resources (ANRZQ), and Peabody Energy (BTUUQ). However, the continued strength in metallurgical coal demand could offset the impact of lower thermal coal volumes to some extent.

According to company filings, ARCH is estimated to produce 7.0 million to 7.5 million tons of metallurgical coal in 2017. Out of this estimated production, ARCH had committed 2.1 million tons as of September 30, 2016.

ARCH derives revenues from its operations in PRB (Powder River Basin), the Illinois basin, and the Appalachian region. According to the EIA, lower coal supplies, increased summer electricity demand, and higher natural gas prices led to higher steam coal prices in all five producing areas in 2H16 as compared to 1H16.

Coal prices in the Northern Appalachian region were lower in 4Q16 as compared to the same period in 2015. In contrast, coal prices in the Central Appalachian region and Illinois Basin were marginally higher in 4Q16 when compared with 4Q15.

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