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Arch Coal’s plans to more than triple production of metallurgical coal to as much as 7 million tons this year will create an expansion of production capacity at the company’s Cumberland River Coal mining complex on the Kentucky-Virginia border, the St. Louis Post-Dispatch
reported this week.

The recession, mild weather and concerns about impending climate legislation led to a drastic drop in demand for coal last year, but demand is trending upward as foreign demand for steel increases.

Coal companies are scrambling to keep pace with demand for metallurgical coal used by steel mills as both U.S. and foreign steel markets rebound, Jeff rey Tomich of the Post-
Dispatch
reported.

Domestic steel mills are running at 73 percent capacity after slipping below 40 percent in 2008. Asian mills, which never dropped as steeply as U.S. ones, are running at full steam.

“Met coal is literally red hot and in short supply globally,” Arch Coal CEO Steven Leer told Tomich.

Increasing output of metallurgical coal has been difficult with declining reserves in the Appalachian Mountains — the source of most U.S. supplies — and recent closures of several small Chinese mines. “Eventually, recovering demand collides with a decline in production and can create a shortage,” Paul Forward, a coal analyst at Stifel Nicolaus & Co., told Tomich. The shortage has resulted in a sharp increase in metallurgical coal prices.

John Anton, an analyst at IHS Global Insight, told the Post-Dispatch
that steelmakers had spent the past six months playing catchup because the cutbacks in late 2008 were so swift and so drastic that inventories were cut.

“Better safe than sorry was the steelmakers’ point of view,” he said. “They had cut so deeply that the last quarter of last year and the first quarter of this year was just inventory restocking.”

Demand for U.S. metallurgical coal will increase by almost one-third to 69 million tons this year with most of that production being sold to Europe, Asia and South America.

“Arch, Peabody and Patriot have all announced plans to take advantage of rising prices by maximizing output,” Tomich writes.

Increasing metallurgical coal output was complicated by last month’s West Virginia mine explosion that killed 29 miners. The Upper Big Branch mine was projected to ship around 2 million tons of coal this year, almost all going to steel production.

How long the increase in steel production and subsequent demand for met coal will last is up for debate, Tomich wrote, adding that “the same type of rally was under way in 2008 when the economy went into a nosedive and capital markets seized up. ”

Anton, the steel analyst, told Tomich he doubts the current pace of steel production is sustainable. Anton said steelmakers are “playing catch-up with a vengeance. Not only will we see inventory replenishment, but we will probably get into surplus in the second half of the year and see prices come back down.”

Based in Appalachia, Va., Cumberland River Coal sold 1.6 million tons of coal mined from its underground and small-scale surface mines in Letcher County and Wise County, Va., in 2009.

Sources for this report include

the Institute for Rural
Journalism and Community
Issues and the St. Louis Post-
Dispatch.



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