Why weak rail connectivity affects Alpha’s steam coal business

Market Realist

Why cost savings helped Alpha Natural Resources' 2Q14 earnings (Part 4 of 9)

(Continued from Part 3)

Alpha’s steam coal business

Just like the met coal business, volumes and realization per ton at the Alpha’s (ANR) thermal coal business were down—though less dramatically. Thermal coal revenues were down 4.4% (or $24.3 million) to $531.5 million in 2Q2014 from $555.8 in 2Q2013.

The Eastern coal business shipped 7.5 million tons of steam coal in 2Q2014. This was around 0.3 million tons more than the 7.2 million tons shipped in 2Q2013. But realization per ton dropped to $58.5 in 2Q2014 from $62.5 in 2Q2013. This resulted in revenues from the Eastern steam coal segment dropping 2% to $438 million.

Western coal (with mines in the Powder River Basin, or PRB, Wyoming) volume dropped to 7.9 million tons in 2Q2014 from 8.8 million tons in 2Q2013. This fall was primarily due to rail underperformance and production curtailments. The company’s sales realization for Western steam coal was also down to $11.81 in 2Q2014 from $12.37 in 2Q2013.

PRB rail connectivity

Underperformance of rail connectivity has been a key issue for coal producers (XME) operating out of PRB, including Alpha (ANR), Peabody Energy (BTU), Arch Coal (ACI), and Cloud Peak Energy (CLD). Producers have been forced to reduce guidance, as they’re not in a position to deliver committed coal to customers due to rail connectivity issues. Rail connectivity issues have added to coal producers’ costs per ton as fixed costs are divided over fewer tons.

Railroad companies are understaffed. Moreover, coal has to compete with other commodities offering higher margins to railroads for rail wagons. So management doesn’t expect connectivity to improve materially during the rest of 2014.

Apart from PRB rail connectivity issues, competition for the company’s Western steam coal business from the Illinois basin and regulatory issues are hampering the company’s thermal coal business.

Met and thermal coal volumes are down. So are realizations per ton. The only way the company can maintain its gross margin per ton is through cost cuts. We’ll talk about the company’s cost performance in the next part of this series.

Continue to Part 5

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