Company overview: Arch Coal Inc. (Part 4 of 9)
Where are their customers?
As of 3Q 2013, 16% of Arch Coal’s revenue was derived from sales to their 3 largest customers and 36% of their total coal revenues were to their 10 largest customers. As a huge supplier of coal in the American market, they currently represent about 15% of America’s annual coal supply. A huge majority of that supply goes towards producers of electric power over 37 different states. For fiscal year 2012, the company recorded its foreign revenue by coal destination and around 60% of their coal was shipped to Europe with Asia coming in 2 nd at 17%. As a large percentage of Arch Coal’s revenue is derived from a small number of customers in long term supply agreements, we could say that Arch Coal will be able to maintain a relatively steady volume of sales over the years. This is of course provided that there are not large swings in coal prices as most long term supply agreements do have a price reopener provision which allows the two parties to renegotiate the price agreement should the price deviate greatly from previously agreed.
How they reach their customers
From mining the coal, Arch Coal moves all its coal to a load out facility that is typically located a short distance from the mine. From there, coal is either transported to an export facility for its international customers or straight to their domestic customers. For domestic customers, the customer usually bears the cost of transporting the coal to their respective locations by rail, truck or vessels. According to the EIA, transportation costs for coal has increased by nearly 50% over the past decade. However, even though the customer covers the hefty transportation cost, the cost is still relevant to Arch Coal as customers usually choose their coal suppliers based on the proximity of their location to the load out facilities. This is mainly due to the lower transportation cost incurred as the distance between the mine and the customer decreases.
For their international customers, coal is typically sold at an export terminal. Thus, Arch Coal is responsible for the transportation of the coal to the export terminals via rail or trucks. Likewise with their domestic customers, the transportation costs from the export terminal onwards to the customer’s prospective location are covered by the customer.
Browse this series on Market Realist:
- Part 1 - A handy investor guide to Arch Coal (ACI)
- Part 2 - Where does Arch Coal mine and what are the implications?
- Part 3 - How does Arch Coal earn revenue and free cash flow?
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