Overview: Arch Coal’s important role in the US met coal industry

Market Realist

Assessing Arch Coal's 2Q14 earnings and cost-saving measures (Part 0 of 1)

Uses of met coal

Metallurgical coal is used to make coke for iron and steel as well as foundries. Coke is made by heating metallurgical coal at a high temperature of ~2,000 degrees Fahrenheit in the absence of oxygen to prevent it from burning. The process separates impurities, and what’s left is called “coke,” a carbon-heavy substance. Coke is then used to convert iron ore into molten iron in the steelmaking process.

The majority of metallurgical coal produced in the U.S. is exported. In fact, metallurgical coal dominates overall U.S. coal exports. In Q1 2014, the U.S. exported 28 million short tons of coal. Of this, 17 million shorts tons (or 60%) was metallurgical coal.

Metallurgical coal exports have grown especially since 2007, when supply constraints in the Pacific market resulted in fast-growing Asian countries, notably China, importing metallurgical coal from the U.S. U.S. exports to China grew from just 12 thousand short tons in 2007 to 10.6 million short tons in 2012.

Slowing demand

However, demand from China is slowing for multiple reasons. These include rising production in Australia and slowing economic growth. China imported 3.9 million tons of coal from the U.S. in Q1 2013. In Q1, imports fell to just 781 thousand tons.

As you saw earlier, the majority of the metallurgical coal exported by the U.S. went to Asian countries in the past. With rising production levels in Australia, Asian countries find it more cost-effective to import from Australia than from the U.S. The prices were as high as $330 per ton in 2011 due to shortages on account of floods in Australia.

With the current state of oversupply, prices have fallen as low as $100–$120 per ton. The lower prices and lower demand from Asia have resulted in a difficult time for U.S. metallurgical coal producers (KOL) like Alpha Natural Resources (ANR), Arch Coal (ACI), and Walter Energy (WLT).

While Peabody Energy (BTU) doesn’t have any metallurgical coal assets in the U.S., its Australian operations are hampered by lower metallurgical coal. To learn more about Peabody Energy’s second quarter updates, read the Market Realist series  Why Peabody Energy fell despite higher-than-expected sales .

Steam coal

So how’s Arch Coal’s steam coal business doing? Read on to the next part of this series to find out.

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