Wednesday, August 29, 2012

Big Coal Faces Steel Slowdown Amid Shale-Gas Pain

Four of the largest U.S. coal producers [Alpha Natural Resources Inc., Peabody Energy Corp., Arch Coal Inc. and Walter Energy Inc.] made $20 billion of acquisitions last year to reduce their dependence on the domestic power industry. They have completed takeovers that boosted sales of metallurgical coal used in steelmaking. The companies bet that the coal, which sells for a higher price than the thermal variety burned to generate electricity, would benefit from booming Asian demand and counter threats from falling natural-gas prices and extra environmental regulation.

That strategy isn’t working out as planned. Prices for metallurgical coal have fallen so far this year amid slowing steel output in China and Europe. U.S. coal producers have been closing mines and firing workers this year as some power plants switch from coal to gas.
Thermal Coal
Prices for Central Appalachian thermal coal, the U.S. benchmark, have declined to $58.12 a ton on the New York Mercantile Exchange. Metallurgical-coal prices are down to $192.50 a ton, according to data published weekly by Energy Publishing Inc. China, the second-largest economy and biggest steelmaker, expanded 7.6 percent in the second quarter, the slowest pace in three years.
Also adding to the gloom is the recession in Europe, the destination for about half of U.S. metallurgical-coal exports. Luxembourg-based ArcelorMittal, the world’s largest steelmaker, was cut to junk by Standard & Poor’s on Aug. 2. According to some experts, metallurgical coal won’t rebound in 2013 and will average $210 next year, while thermal coal will be $70.
Alpha paid $7.5 billion including debt for Massey Energy Company in July 2011. Alpha has plunged 70 percent this year, the worst performer on the Standard and Poor’s 500 Index.
Not all producers made similar decisions on metallurgical coal. Consol Energy Inc. opted to expand into gas, paying $3.5 billion for assets of Dominion Resources Inc. Canonsburg, Pennsylvania-based Consol overtook Peabody in May as the biggest U.S. coal miner by market value.
Most metallurgical coal that’s 'seaborne' -- the industry term for coal exported by oceangoing ship -- is priced each quarter based on a benchmark established by the largest exporters and users.
U.S. coal producers have been affected by unusually warm winter weather, which helped to curb demand for thermal coal. The industry is also facing regulations from the Environmental Protection Agency restricting the burning of coal to produce power, limiting new mining permits and enacting tighter water- quality limits. The increasing regulatory burden combined with competition from cheaper gas has put U.S. coal producers’ “backs to the wall,” and metallurgical-coal hasn’t helped. (Wash Post, 8/29/2012)

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