Why ANR’s Met Coal Shipments Will Decline This Year Despite Higher Global Steel Production

Alpha Natural Resources (NYSE:ANR), one of North America’s largest coal miners, has been banking on its metallurgical (met) coal business to hedge the uncertain long-term prospects of its thermal coal operations. However, met coal markets have been facing headwinds of late, due to a glut in the seaborne markets that was brought about by new mining projects in Australia. For 2014, in addition to sluggish pricing trends, Alpha has also guided for lower shipment volumes for met coal, despite an expected increase in global steel production.

Trefis has a $5.40 price estimate for ANR, which is about 20% ahead of the current market price.

See Our Complete Analysis For Alpha Natural Resources

Recovering Steel Demand Unlikely To Help ANR As Mills Seek Better Pricing On Met Coal

Met coal is used to produce coke, an important component in the steel making process. Demand for the commodity is driven by global steel production, which is tied to the health of the broader global economy. For 2014, overall steel production is expected to grow by around 3.6%, driven by resurgent demand in Europe as well as growth in regions such India, the Middle East and Latin America. ^[1] However, China, which has typically been the largest driver of met coal demand, is expected to see lower growth this year due to slowing infrastructure spending. Although the shifting demand mix appears to be favorable to Alpha, given that Europe and Latin America have traditionally been among its biggest markets, the company has actually guided lower met coal volumes for 2014. The company expects to ship between 16 to 20 million tons of met coal this year, down from around 20.13 million tons in 2013. ^[2]

This is likely because steel producers are seeking better pricing on their met coal inputs in this oversupplied market, and U.S. producers such as Alpha are unable to match these prices. The global met coal markets are expected to remain oversupplied this year, with as much as 10 million tons of additional supply hitting the markets. ((Alpha Natural Resources Q4 2013 Earnings Call Transcripts, Seeking Alpha, February 2014)) Alpha (and other U.S. producers) face a significant disadvantage on the cost front compared to Australian miners, who have come to control a large portion of the global met coal supply. Much of America’s coking coal reserves are located in the Appalachia region, where coal is located deeper underground and is more costly to mine. For instance, as of last year,  Australia’s BHP Billiton had production costs of around $110 per metric ton of coal, compared to over $135 per ton for U.S. producers. ((Coal Exports Plunge, The Wall Street Journal, June 2013)) Additionally, Australian producers have been benefiting from a weak domestic currency (the Australian dollar  has fallen 15% over the last year), which has further improved their cost advantage relative to U.S. producers.

1. Global steel industry set for recovery, Financial Times, January 2014 [↩]
2. ANR Q4 2014 Press Release [↩]