Lower coal prices

Steel companies such as U.S. Steel Corporation (X), ArcelorMittal (MT), and AK Steel (AKS) use coking coal as a raw material for their blast furnaces.

Coking coal prices were on fire last year following the closure of some Chinese mines and supply disruptions in Australia. However, coking coal prices have lost some of their gains. In this article, we’ll see what lower coal prices mean for different steelmakers (NUE).

What Lower Coal Prices Mean for U.S. Steel and ArcelorMittal

U.S. Steel

U.S. Steel buys coal under quarterly contracts in Europe. Because coking coal prices have fallen over the last couple of months, it’s safe to assume that U.S. Steel’s coal costs in the next few quarters will be lower than they are in 1Q17. Lower coal prices should boost U.S. Steel’s 2017 profitability and help it beat its earnings guidance.

ArcelorMittal

According to ArcelorMittal, it uses ~35 million metric tons of coking coal per year. Of that amount, only 6 million–7 million metric tons come from its captive mines. The company buys 5 million metric tons of coking coal under annual contracts in the United States, and the remaining 24 million metric tons of coal are almost evenly distributed between spot and quarterly pricing. ArcelorMittal’s European operations would likely benefit from lower coking coal prices (TECK).

However, the recent downward correction in coal prices won’t mean much for AK Steel or U.S. Steel’s US operations, as both of these companies have already settled their annual contracts for 2017. Having said that, both companies managed to settle their 2017 coal contracts at very low prices considering the big spike in coal prices last year.

In the next article, we’ll look at the recent trend in Chinese steel prices.

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