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Coal prices going up



CHARLESTON, W.Va.

The market for metallurgical coal used to make steel may not be as big as the market for coal used in power plants, but it’s where the money is going.

Interest in metallurgical, or met, coal, which has seen significant price increases in recent months, was the driving force behind three large mergers in the American coal industry in recent months, including this week’s announcement by St. Louis-based Arch Coal that it is buying Scott Depotbased International Coal Group, or ICG. But West Virginia has seen renewed interest in met coal for several years as foreign steel producers have bought met coal reserves and mines.

“We have had a lot of inquiries from foreign buyers — China, Europe, India — that are wanting to buy producers of coal,” said Bill Raney, president of the West Virginia Coal Association.

Helping the market for met coal is the impact of recent rains in Australia, the world’s largest met coal exporter. According to a recent news article carried by Reuters, coal is Australia’s top export earner. Flooding in that country caused a production drop of about 15 percent of annual output, which is leading to a worldwide shortage of met coal as demand is increasing.

One result of that is record prices for met coal from Australia.

Growth in China and India is driving much of the demand for met coal, but there’s also the question of how much steel Japan will need to rebuild from the recent earthquakes and tsunamis.

In a presentation to investment analysts this week following Arch Coal’s announcement about ICG, Arch officials said they expect worldwide steel consumption to increase about 60 percent over the next decade.

Arch expects the combined company to produce 11 million tons of met coal this year. That number should increase to 14 million tons after the Tygart Mine No. 1 in Taylor County becomes operational in 2014.

Met coal prices started rising around 2008 when oil prices had a price spike, said Matthew Warder, a coal research analyst for Wood Mackenzie Research and Consulting. Prices of other commodities rose along with oil, but met coal didn’t collapse when the economy went into recession. World demand for met coal has remained strong. When that demand is coupled with met coal’s ongoing supply problems, prices for that grade of steelmaking coal have remained strong.

Foreign-based companies, mainly those that make steel, have been buying coal reserves and mines in West Virginia for several years.

American-based companies are pursuing mergers and acquisitions as they seek a greater foothold in met coal markets and as they try to reduce the cost of mining through operations of scale, Warder said.

Those are seen in Arch’s $3.4 billion acquisition of ICG, Alpha Natural Resources’ $8.5 billion takeover of Massey Energy and Walter Energy’s $3.3 billion acquisition of Western Coal.

For foreign companies, the reasons are different.

“They’re really in the process of vertically integrating out of necessity,” Warder said. “They’re concerned about (their) future supply.”

Coal companies expect the strong market for met coal to continue for a while.

“ The structural shortage in metallurgical coal is expected to continue for at least the next few years as a result of limited supply in established coal basins coupled with long leadtimes to bring on significant production in new basins,” Richard M. Whiting, president and CEO of Patriot Coal, in his company’s firstquarter earnings report.

Patriot said its average selling price for Appalachian thermal coal in 2011 should be around $59 per ton, while met coal will average $127. Patriot has signed at least one contract for $155 per ton.

Through all the excitement over metallurgical coal, thermal coal could see its market improve, too. Arch expects an increase in thermal exports. It cites reports that 249 gigawatts of coal-fired electric power is under construction or in planning worldwide, with nearly three-quarters of it in China and India.

Alpha Natural Resources also sees potential for growth in overseas thermal markets.

In its first-quarter earnings report, Alpha said the market for seaborne thermal coal tightened in the first quarter as supply was constrained by weatherrelated interruptions in Colombia, Indonesia and Australia. Also, the future of nuclear power growth has been clouded by the disaster in Japan.

Distributed by The Associated Press



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