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Metallurgical Coal Update
Producers of metallurgical coal must be nervously watching the raging debate over the economy, as the fortunes of producers of this commodity are tied tightly to global economic growth, particularly in the developing world.
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The Process
The demand for metallurgical coal is tied to the level of activity in the steel industry as this commodity is used in the process of making steel. Metallurgical, or coking, coal is first converted to coke through heating the coal in an oxygen free environment. After the coke is produced, it is added to iron ore in another high-temperature environment to produce iron. Every ton of steel made in a traditional blast furnace requires 0.6 tons of metallurgical coal, according to the World Coal Institute. Approximately 66% of all steel is manufactured using this method.
Steel Statistics
The global production of steel in July, 2010 totaled 115 million metric tons, a 9.6% increase on a year-over-year basis. Capacity utilization was 75.1% in July, 2010, up on a year-over-year basis, but a sequential decrease from capacity utilization of 80.4% in June, 2010.
Demand
World seaborne or export demand for metallurgical coal is expected to increase 20% in 2010 over 2009, with strong demand coming from Asia and South America. The largest importers of metallurgical coal in 2010 include China (44 million tons), India (30 million tons) and Brazil (14 million tons). Japan, Korea and Taiwan will require another 94 million tons in 2010.
Supply
World seaborne supply of metallurgical coal is expected to increase by 13% in 2010 over 2009, with supply growth coming from the United States and Australia. Many companies have been adding capacity. Massey Energy (NYSE:MEE) recently announced that the company was developing a new mine to produce metallurgical coal in West Virginia. The company will spend between $100 million and $160 million through 2012 at the Rowland reserve.
Prices
The recent benchmark price for metallurgical coal was $209 per metric ton, with analyst forecasts of prices for 2011 between $190-275 per metric ton. The mean price forecast for 2011 is $221 per metric ton.
Companies
Massey Energy updated its guidance for 2011 and 2012, and made favorable comments on the outlook for metallurgical coal prices during that time frame. "Our early negotiations with metallurgical coal customers give us reason to expect pricing in 2011 will be favorable to what we have realized in 2010," said Don Blankenship, the CEO of Massey Energy.
Cliffs Natural Resources (NYSE:CLF) is one of the most leveraged domestic producers of metallurgical coal. The company expects to sell a total of 3.9 million tons of coal in 2010, of which 3.4 million will be metallurgical coal.
Other companies are less optimistic in the long-term. Alpha Natural Resources (NYSE:ANR) estimates that the large number of planned capacity additions through 2015 might lead to an oversupply of metallurgical coal.
TECO Energy Inc. (NYSE:TE), a utility in Florida that owns Teco Coal, raised guidance for the current fiscal year due to "better prices and demand" for its products, including metallurgical coal.
The Bottom Line
The success of many coal companies is tied to the demand for steel, which is further linked to general growth in the economy. Economists are split over whether the economy will continue its sluggish growth or slide into another recession. (Find out which futures, options, or funds will be your perfect commodity portfolio fit. for additional reading, refer to How To Invest In Commodities.)
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The Process
The demand for metallurgical coal is tied to the level of activity in the steel industry as this commodity is used in the process of making steel. Metallurgical, or coking, coal is first converted to coke through heating the coal in an oxygen free environment. After the coke is produced, it is added to iron ore in another high-temperature environment to produce iron. Every ton of steel made in a traditional blast furnace requires 0.6 tons of metallurgical coal, according to the World Coal Institute. Approximately 66% of all steel is manufactured using this method.
Steel Statistics
The global production of steel in July, 2010 totaled 115 million metric tons, a 9.6% increase on a year-over-year basis. Capacity utilization was 75.1% in July, 2010, up on a year-over-year basis, but a sequential decrease from capacity utilization of 80.4% in June, 2010.
Demand
World seaborne or export demand for metallurgical coal is expected to increase 20% in 2010 over 2009, with strong demand coming from Asia and South America. The largest importers of metallurgical coal in 2010 include China (44 million tons), India (30 million tons) and Brazil (14 million tons). Japan, Korea and Taiwan will require another 94 million tons in 2010.
Supply
World seaborne supply of metallurgical coal is expected to increase by 13% in 2010 over 2009, with supply growth coming from the United States and Australia. Many companies have been adding capacity. Massey Energy (NYSE:MEE) recently announced that the company was developing a new mine to produce metallurgical coal in West Virginia. The company will spend between $100 million and $160 million through 2012 at the Rowland reserve.
Prices
The recent benchmark price for metallurgical coal was $209 per metric ton, with analyst forecasts of prices for 2011 between $190-275 per metric ton. The mean price forecast for 2011 is $221 per metric ton.
Massey Energy updated its guidance for 2011 and 2012, and made favorable comments on the outlook for metallurgical coal prices during that time frame. "Our early negotiations with metallurgical coal customers give us reason to expect pricing in 2011 will be favorable to what we have realized in 2010," said Don Blankenship, the CEO of Massey Energy.
Cliffs Natural Resources (NYSE:CLF) is one of the most leveraged domestic producers of metallurgical coal. The company expects to sell a total of 3.9 million tons of coal in 2010, of which 3.4 million will be metallurgical coal.
Other companies are less optimistic in the long-term. Alpha Natural Resources (NYSE:ANR) estimates that the large number of planned capacity additions through 2015 might lead to an oversupply of metallurgical coal.
TECO Energy Inc. (NYSE:TE), a utility in Florida that owns Teco Coal, raised guidance for the current fiscal year due to "better prices and demand" for its products, including metallurgical coal.
The Bottom Line
The success of many coal companies is tied to the demand for steel, which is further linked to general growth in the economy. Economists are split over whether the economy will continue its sluggish growth or slide into another recession. (Find out which futures, options, or funds will be your perfect commodity portfolio fit. for additional reading, refer to How To Invest In Commodities.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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