ANR: Trends Driving Metallurgical Coal Prices
Alpha Natural Resources (NYSE:ANR) has been counting on its metallurgical (met) coal division to hedge the uncertain long term prospects of its thermal coal business. Unlike thermal coal, which is used primarily for electricity generation and faces mounting threat from cheaper and more environmentally friendly natural gas, there is currently no effective substitute for met coal. Met coal is used to produce coke, an important component in the steel making process.
ANR acquired Massey Energy in 2011 to become America’s largest met coal producer, and we estimate that the company’s met coal division accounts for around 45% of its Trefis price estimate. Unlike the thermal coal business which relies on the U.S. market, around 75% of ANR’s met coal production is exported, allowing the firm to diversify a large portion of its revenue stream. Europe is ANR’s largest export market followed by Asia. [1] ANR’s met coal sales grew from around $1.54 billion to around $3.6 billion between 2009 and 2011, as demand for steel from emerging countries coupled with a recovery in developed countries helped to stimulate demand. However, the division has been facing significant headwinds over the last two years, and its near term outlook also looks relatively challenging.
Here are some of the trends that we believe will influence the business going forward.
- Alpha Natural Resources’ Earnings Review: Weak Coal Demand And Pricing Weigh On Q1 Results
- Alpha Natural Resources’ Earnings Preview: Weak Coal Demand And Pricing To Weigh On Q1 Results
- Two Scenarios That Could Boost Alpha Natural Resources’ Stock Price
- Trends Driving Our $1 Price Estimate For Alpha Natural Resources
- Alpha Natural Resources’ Earnings Review: Weak Coal Demand And Pricing Weighs On Q4 Results
- Alpha Natural Resources’ Earnings Preview: Weak Coal Demand And Pricing To Weigh On Q4 Results
Lower Demand From China And Strong Seaborne Supply Have Hit Pricing
- Firstly, the world’s largest steel producer and met coal consumer, China, has been ramping up its domestic met coal production and has also been recycling more scrap metal to make steel. While ANR’s met coal business doesn’t have much exposure to the Chinese market, it has been indirectly impacted.
- Additionally, the sovereign debt crisis in Europe, which is one of ANR’s primary markets has also hit sales. Average realized prices fell from around $156 per tonne in 2011 to around $138 per tonne in 2012. Prices dipped further to under $120 during the second quarter of fiscal 2014 due to increased imports in the coastal regions primarily from Colombia and a shift of cross over met coals into the thermal market. [2]
Near Term Outlook Remains Challenging Despite Expected Growth In Global Steel Production
ANR’s met coal division faces some other challenges as well in the near term. While the firm produces higher quality met coal than what is available in China and some emerging markets, it still trails some other manufacturers 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. ANR and other American producers face a disadvantage on the cost front as well, compared to Australian producers. Things could get worse 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.
Some Markets To Watch
According to the world steel association, global steel demand is projected to grow by around 3.1% in 2014, down from around 3.6% growth seen in 2013, and then further expand to around 3.3% in 2015. [3] While Chinese steel consumption is expected to grow by around 3% this year, it may not help overall met coal demand much since China has also been boosting its met coal production. [3] India, which was ANR’s largest export market last year, could see met coal demand grow further since steel production in the country is expected to grow by around 3.3% in 2014 and by around 4.5% in 2015, on the back of structural reform which will support infrastructure investment. [3] Europe, one of the key markets for Alpha’s metallurgical coal, is expected to increase its steel demand by around 3.1% this year. [3]
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Notes:- ANR Investor Presentation [↩]
- Alpha Natural Resources CEO Kevin Crutchfield Discusses Q2 2014 Results, Seeking Alpha, August 2014 [↩]
- worldsteel Short Range Outlook 2014-2015, World Steel Association, April 2014 [↩] [↩] [↩] [↩]