Alpha Natural Resources (NYSE:ANR), one of North America’s largest coal producers, reported its Q3 2013 earnings on October 31, displaying a relatively downbeat set of numbers that nevertheless exceeded market expectations. The results were impacted by lower price realizations for both metallurgical and steam coal, as well as lower shipment volumes for steam coal. Quarterly revenues fell by nearly 27% year-over-year to around $1.2 billion, while the adjusted net loss widened to around $134 million from around $35 million last year. ((ANR Q3 Earnings Press Release)) Below is a brief overview of the earnings and some of the trends underlying the numbers.
Thermal Coal Shipments Fall, Outlook Could Improve
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ANR’s thermal coal business continued to be weighed down by weak demand in its primary market, the United States. Powder River Basin (PRB) coal volumes were down by around 24% year-over-year to 10.1 million tons, while Eastern steam coal shipments were down by about 32% to around 6.7 million tons. The average price realization for PRB coal stood at around $12.58 per ton, down by around 3% compared to last year, while realizations for Eastern steam coal were down by around 5% to $63 per ton.
The decline in volumes has come despite the fact that coal consumption by the power generation sector, the largest consumer of steam coal, has actually been rising through the year. According to the U.S. EIA, coal consumption for electricity generation grew from about 212 million tons in Q1 2013 to about 243 million tons in Q3. However, utilities have been drawing down on their coal stocks and inventory levels, measured in terms of days of burn are now at below average levels. For instance, PRB inventory stands at around 60 days of burn compared with the historical five-year average of around 66 days of burn.  The decreasing inventory trends could indicate that demand will improve going forward, potentially bringing about some supply demand rationalization going forward. At the moment , the company expects to ship a total of between 61 to 68 million tons of steam coal in 2014, which would be slightly lower than its estimates for 2013 shipments.
Met Coal Pricing Likely Bottomed Out In Q3
Alpha’s metallurgical coal business faced some headwinds during the third quarter as price realizations for the commodity declined to an average of $95 per ton, down by around 27% since last year and down by about 6% sequentially due to a supply glut in the seaborne market. However, the company says that market conditions for metallurgical coal is improving, as the global benchmark price for met coal saw a $7 rise during the current (fourth) quarter.
The met coal market is traditionally cyclical, and we believe that the outlook could improve going forward as the global economy and steel production pick up. According to the World Steel Association, global steel consumption will grow by around 3.3% in 2014.  Additionally, there have been extensive production cutbacks by miners in the United States, Canada and Australia which could lead to a reduction of around 10% of seaborne supply compared to 2012.  The improving demand coupled with scaled back production could bode well for met coal pricing next year. ANR expects to ship between 18 and 22 million tons of metallurgical coal in 2014, which is almost similar to its expected volumes for 2013.Notes: