ANR Q2 Preview: Met Coal Pricing And Weak Thermal Coal Demand Expected

Alpha Natural Resources (NYSE:ANR) is expected to release its Q2 earnings on August 2. The company has had a difficult year so far, impacted by falling metallurgical coal  prices and sluggish demand for thermal coal. In the first quarter, revenues declined 32% year-over-year to $1.33 billion while operating losses widened to $130 million. ^[1] We believe that this quarter will continue to be challenging for Alpha, especially on the pricing front, given the oversupply in the seaborne met coal market while thermal coal sales could also come under pressure from softening natural gas prices.

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Thermal Coal Business: Falling Gas Prices And Weak Exports Could Weigh On Results

ANR’s outlook for thermal coal shipments for this year have been relatively downbeat, projecting that Eastern thermal coal shipments could fall by around 24% compared to last year while powder river basin (PRB) coal shipments could decrease by around 14% compared to last year. ^[2] Natural gas prices have decreased from their April highs of around $4.2 per MMBtu to current levels of around $3.7 per MMBtu, and we believe that this could have impacted coal demand as utility companies switch back to natural gas generation. Much of ANR’s thermal coal (particularly Eastern coal) remains unviable if gas prices are under $4 per MMBtu. ^[3] Thermal coal demand will also be hurt in the long run given the proposed climate legislation which seeks to impose carbon emission limits on existing power plants. (Related read: How Obama’s Climate Action Plan Impacts the Energy Sector and Stock We Cover)

Like many other U.S. thermal coal producers, Alpha has been seeking to ramp up its thermal coal exports to international markets to hedge against an increasingly evident long-term decline in its U.S. thermal coal business. However, progress has been quite slow since prices for seaborne coal have been depressed off late due to strong supply from other American and Australian miners, and also due to weaker demand from China, which is the worlds largest thermal coal consumer. The U.S. Energy Information Administration estimates that U.S. coal exports will decline by around 11% this year.

Metallurgical Coal Division: Pricing Pressures Will Persist

Met coal has typically accounted for more than half of ANR’s coal revenues. Met coal is used to produce coke, a key component in the steel making process. During the first quarter, ANR’s realized prices for met coal fell to around $103 per tonne from around $145 a year earlier, and we believe this quarter could continue to be challenging due to lower seaborne demand from China (which accounts for around 60% of global blast furnace steel production) as well as due to lower steel production in Europe. While ANR’s met coal business doesn’t have much exposure to the Chinese market, it could be indirectly impacted. ANR and other American producers face a disadvantage on the cost front as well, compared to Australian producers. For instance, BHP Billiton has production costs of around $110 per metric tonne compared to over $130 per tonne for U.S. producers. ^[4] Things could become more challenging as some Australian companies like BHP have recently brought new mines online and are expected to ramp up their exports further, increasing supply in the seaborne coal market.

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1. ANR Press Release [↩]
2. ANR Form 8-K [↩]
3. Seeking Alpha [↩]
4. WSJ [↩]