What To Expect From ANR’s Metallurgical Coal Business In 2014

Alpha Natural Resources (NYSE:ANR) has been counting on its metallurgical coal business to hedge uncertain long-term prospects of its thermal coal operations. Unlike thermal coal, which is used primarily for electricity generation and faces a mounting threat from cheaper and more environmentally friendly natural gas, there is currently no effective substitute for met coal which is used to produce coke, an important component in the steel making process. The metallurgical coal business accounts for roughly 50% of Trefis price estimate for ANR’s stock and around 40% of the company’s overall revenues. In this note, we look at some of the trends that influenced Alpha’s metallurgical coal business over the past year and what to expect going into 2014. (Related: Some Recent Trends Driving ANR’s Met Coal Business)

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2013: Pricing Slump And Sluggish Volume Growth

The year 2013 turned out to be a tough year for the met coal business as price realizations for the commodity tumbled while shipments remained somewhat flat despite the fact that global crude steel production actually rose by around 3% year to year. ^[1] Alpha’s met coal shipments for the first 9 months of the year stood at roughly 15.7 million tons compared to around 15.4 million tons during the same period last year, as growth in domestic metallurgical coal shipments offset the decline in the export markets. However, average selling prices were down from around $134 per ton last year to just about $100 per ton. ^[2] The reasons for the price decline were manifold. Firstly, there has been a glut in the global seaborne met coal markets due to strong supply from Australia, one of the world’s largest metallurgical coal producers. Secondly, the economic sluggishness in markets such as Europe and Brazil, as well as some uncertainty regarding Chinese steel production growth, also played a part in keeping prices depressed through the year. ^[3] Additionally, Alpha has also been shipping a larger mix of cheaper and lower grade metallurgical coals as compared to last year, bringing down average price realizations.

2014: Global Met Coal Markets Should Improve, But ANR Could Face Some Specific Challenges

There are indicators that the global met coal markets have bottomed and that the outlook could improve going forward. A global economic recovery, as well as extensive production cutbacks by miners in the United States, Canada and Australia, are chief among them. Still, ANR does face some specific challenges in regaining momentum in its met coal business. While the firm produces higher quality met coal than what is available in China and some emerging markets, it still trails miners such as Canada’s Teck Resources (NYSE: TCK) and Australia’s BHP (NYSE:BHP), which are well-positioned in the premium hard coking coal market. ANR’s variety is largely composed of “hi-volatility B” coal, which is more volatile than premium hard coking coal and produces a lower quantity of coke and hence commands lower pricing. ^[4] Additionally, ANR and other American producers face a disadvantage on the cost front compared to Australian companies. For instance, Australia’s BHP Billiton has production costs of around $110 per metric tonne of coal compared to over $135 per tonne for U.S. producers. ^[5] Australian producers are also likely to benefit from the currently weak Australian dollar which is helping them to price their output more competitively.

Understand how a company’s products impact its stock price on Trefis

1. World Steel Association [↩]
2. Q3 Form 10-Q [↩]
3. Q2 Form 10-K [↩]
4. Seeking Alpha [↩]
5. WSJ [↩]