Must-read: Assessing Arch Coal’s met coal business in 2Q14

Market Realist

Assessing Arch Coal's 2Q14 earnings and cost-saving measures (Part 1 of 6)

A tough met coal market

“While our met coal capacity lies well above our current sales levels, we simply don’t want to push tons into an already saturated market at this time,” said John Eaves, president and CEO of Arch Coal (ACI), during a conference announcing second quarter earnings.

Last week, Arch Coal (ACI) suspended operations at its Cumberland River Complex located in Wise County, Virginia, and Letcher County, Kentucky, owing to higher coal extraction costs. Mr. Eaves said that the company has “chosen to concentrate our metallurgical production in our lowest cost, highest margin assets to further benefit our already low cost structure in Appalachia, and enhance the overall quality of our metallurgical product mix.”

The company now expects to sell around 6.3 million to 6.9 million tons of metallurgical coal in full-year 2014—lower than earlier guidance. The company sold 3.3 million tons of metallurgical coal in the first half of 2014 at $82 per ton.

Oversupply

Arch Coal (ACI) reported revenues of $714 million in Q2 2014 against $766 million in Q2 2013—a 6.8% drop. The drop in revenues was primarily driven by lower demand and realization for metallurgical coal, as the market remains oversupplied.

By analyst estimates, there is currently 15 million to 20 million tons of oversupply in the global metallurgical coal market. The oversupply scenario has caused prices to drop significantly. This drop affects the operating performance of coal producers (KOL) like Alpha Natural Resources (ANR), Walter Energy (WLT), and Peabody Energy (BTU). These companies derive noticeable parts of their revenues selling metallurgical coal.

The oversupply scenario has compelled some coal producers to suspend operations at their high-cost mines, just like Arch Coal (ACI) has done with the Cumberland River Complex.

Why does the current environment remain unfavorable for metallurgical coal? Find out in the next part of this series.

Continue to Part 2

Browse this series on Market Realist:

View Comments (1)