DTC Blog
DTC's blog highlights pertinent industry observations, proprietary reports and color from the many U.S. and global coal and energy conferences we attend throughout the year. These events provide us with the opportunity to gather first hand market data only available right here.
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WEDNESDAY, May 22, 2013
Each quarter, DTC tracks the changes in Institutional Ownership of the major publically traded US coal companies. This data is both valuable and important because it is indicative of investor sentiment towards the coal market, particularly given recent levels of volatility. The investors on these Top 25 lists have significant exposure to the coal sector and often the best research at their disposal.
- Largest Institutional Investors Variations in Q1 2013: Vanguard Group jumped into the top spot as the largest institutional investor in coal with $1.09 billion invested, although its total position declined from $1.21 billion a quarter ago. Wellington Management substantially decreased its position in coal to $746.52 million versus $1.24 billion last quarter. T Rowe Price Associates was the second largest institutional investor in coal, but decreased its position in the sector overall.
- The report tracks the quarterly changes in holdings for ARLP, ANR, ACI, BTU, CLD, CNX, JRCC and WLT.
- Interested in the Full Details? For full coverage of changes of Institutional Ownership of the major publically traded US coal companies, please contact DTC’s Associate Analyst, Jack Chidester (email:
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, phone: 646.843.0597).
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THURSDAY, May 16, 2013
T. Parker Host export data for April from East Coast ports indicate shipments fell 17.86% seq per diem (pd) and 19.83% YoY to 5.89 mm tons. The declines from a record March are not surprising; however, YTD exports through April are now 0.69% lower YoY, the first YTD YoY decline of 2013. DTC is forecasting a 20 mm ton drop in 2013 exports (10 mm thermal and 10 mm met). Despite the extreme strength in total U.S. Q1 exports (+11.15% YoY), the emergence of a YTD YoY decline in April’s East Coast figures gives us confidence in suggesting that March will be the high-water mark for 2013 exports and declines will continue.
- Met vs Thermal Shipments: YTD through April, East Coast met exports are up 3.14% YoY, while thermal exports are down 7.72% YoY. Strength in met is largely attributed to Asian demand, particularly China. The U.S. exported 3.35 mm tons of coking coal to China from Jan - Apr, up 63.89% YoY. Chinese-bound vessels are becoming less frequent in East Coast vessel schedules, a sign that the strength is beginning to fade. Weakness in thermal shipments is not surprising, as the netback arb for Capp thermal exports has been ‘out of the money’ for quite some time, and contracts booked on the JFY 2012 (Apr ’12 – Mar ’13) basis are rolling off the books.
- How is May Shaping Up? Our preliminary analysis of vessel loadings for May indicates shipments are off another ~25% from April. The actual figures will be available in the next few weeks, but weakness thus far in May jives with our expectations for continued declines.
- Interested in the Full Details? For full coverage of U.S. exports, please contact
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.
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MONDAY, May 6, 2013
The coal and natgas markets continue to evolve and DTC is primed to keep you well informed with our latest report: Coal vs Natgas Switching – Illinois Basin Coal Blending Dynamics.
Get the Facts: Our coal vs. natgas displacement model determines the competiveness of both an un-remediated coal plant purchasing emission credits and a fully remediated coal plant vs a natgas Combined Cycle Gas Turbine (CCGT). While un-remediated coal plants are ‘in-the-money’ vs natgas in all regions of the country except for those burning Capp coal in SERC, the addition of remediation equipment considerably worsens the economics and leaves many regional coal fired power plants uncompetitive.
What many eastern utilities and power companies are doing to gain a competitive edge is experiment with less expensive, lower BTU coals from the Illinois Basin and PRB. The economics are compelling! In this report, we provide the following:
- Coal Blending: To address today’s changing market, we quantify the generation cost impacts that blending different coals in different regions can have on a coal plant’s competitiveness vs CCGT.
- ILB in SERC: We blend Illinois Basin coal with SERC’s traditional Capp coal utilizing a variety of transportation options to determine the financial impact.
- PRB in SERC: We check on the economics of blending PRB with Capp – Southern Company’s recent long term PRB “request for proposal” (RFP) has certainly gotten a lot of attention.
- ILB in PJM West: We assume delivery of ILB via barge into PJM West to see what that could do for genco economics.
- Traditional Analysis: We determine the coal vs natgas switching price for a marginal un-remediated coal plant purchasing emissions credits.
- Remediated Plant Analysis: We determine the coal vs natgas switching price for coal plants equipped with a full suite of environmental remediation equipment that will allow the plant to run after the implementation of MATS in 2015/2016.
- Model Nuances: We provide readers with some of the intricacies of our model and its inputs, such as our heat rate assumptions and commodity price inputs, among others.
- Key Considerations: We provide readers with a whole host of “critical caveats” that will assist them in understanding the complex set of commercial, operational and behavioral issues that impact dispatch.
Conclusion: The cost of adding remediation equipment can add approximately $6.00/Mwh to the cost of coal generation, so from a purely economic standpoint, it is clear why the push to lower-cost coal blending is occurring.
- Blending Impact Example: Our model demonstrates that Capp burning plants in SERC with river access to ILB can see a generation cost improvement of more than $5.50/Mwh assuming a 50%/50% blend, while Napp burning plants in PJM West with river access to ILB can see a generation cost improvement of almost $3.00/Mwh assuming a 50%/50% blend.
- Full Switching Impact Example: Many plant operators may ultimately switch to 100% alternative coal if the blending tests are successful. Under this scenario, ILB delivered by rail into SERC could improve economics by $1.10/Mwh, by river into SERC as much as $11.00/Mwh, and by river into PJM West by about $5.75/Mwh.
We believe the trend towards coal blending will only increase over the next several years. Make sure you have a good handle on it!
Order Your Copy Today! DTC Premium and Utility Gold clients receive this report complimentary and all other DTC clients receive a discounted report rate of $495/copy ($595/copy for non-DTC clients). The report is available through DTC’s online store by clicking here or contacting
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, Director of Client Services (+1 970.241.1510).
Purchased Gordon’s last 'Coal vs Natgas' report (April 2012)? Contact us for a special discount!
Learn more about DTC's Utility Research and contact
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for a 30-day complimentary trial - starting today!
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TUESDAY, April 30, 2013
Ted and I have spent the last week in the city whose motto is ‘Look left’ (or die!), meeting with a veritable cross-section of market participants: physical coal exporters, physical coal traders, financial coal traders, power/natgas traders, hedge funds, private equity funds, OTC coal brokers, shipbrokers, energy-research analysts and a handful of cab drivers with bearish views on Chinese rebar futures! In general, very little to cheer about. The market is currently more bearish than I had expected it to be at this point, but Dortmund and Bayern Muenchen crushed Barcelona and Real Madrid in the Champions League Semi-finals, which is a reminder that there is always hope.
 Takeaways from London: Below is just a sample of key takeaways from our meetings in London. We keep the comments general in nature (to protect our sources), but they provide interesting market perspectives. If you'd like to see the full list and experience a trial to DTC's first-rate service, please contact
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, our Director of Client Services.
- Hedge Fund/Private Equity Sentiment: The bad news was the investors with whom we met were happy to remain on the sidelines; the good news is no one threw us out of their offices and, in fact, agreed that an inflection point would be soon reached.
- East Coast Thermal Exports Dry Up: One physical broker noted new export deals of thermal coal from the East Coast have all but dried up. The only recent U.S. thermal deal into Europe he was aware of was a 2.0 mm ton deal of Illinois Basin coal to a major European utility.
- Bearishness Pervades: The mood amongst European traders was unquestionably bearish. They seemed less bearish than they were when prompt API 2 was north of $90/MT (vs $86/MT currently), but all held a bearish bias. Abundant supply with no signs of cutbacks outside the U.S. was the most common reason cited.
- Shipbroker Expects Q3/Q4 Rebound: A seasoned ship-broker expects dry bulk charter rates to bottom this summer, before a slow, but gradual recovery into 2014 (and beyond). He noted seaborne trade volumes remain very healthy and expects the oversupply in the dry bulk fleet to gradually be absorbed by fewer new ships, continued scrapping and an increase in ‘ton miles’.
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MONDAY, April 22, 2013
Q1 2013 MSHA Production: Every quarter, coal companies are required to report production from their mines to MSHA (Mine Safety & Health Administration) and having this data can give market participants an edge, especially before the companies report quarterly earnings results. If you’re new to our MSHA data flash emails, please see our comprehensive commentary at the bottom of this flash that explains what it is and, more importantly, how to interpret it and how it can help you.
DTC Estimates for Q1 2013 Production Revisions: 96% of all production (both public and private) has been reported as of today and, as a result, we have made our first forecast to the upcoming revision to the EIA’s Q1 production estimate. The EIA will not officially release these until mid-June, but we feel it is important to start looking at them sooner than later. As the rest of production trickles in over the next couple of weeks, we may see slight variations, but given the extreme focus on production cutbacks, it is important to share the preliminary figures now:
- Capp: 5.07 mm ton downward revision, to Q1 production of 33.04 mm tons.
- Napp: 1.15 mm ton upward revision, to Q1 production of 32.13 mm tons.
- PRB: 3.35 mm ton upward revision, to Q1 production of 104.62 mm tons.
- Ill Basin: 3.18 mm ton upward revision, to Q1 production of 34.13 mm tons.
- Alabama: 0.23 mm ton downward revision, to Q1 production of 4.58 mm tons.
- CO/UT: 1.71 mm ton upward revision, to Q1 production of 9.92 mm tons.
- West: 0.46 mm ton upward revision, to Q1 production of 7.21 mm tons.
- Other: 0.99 mm ton downward revision, to Q1 production of 19.64 mm tons.
- Total: 4.00 mm ton upward revision, to Q1 production of 245.72 mm tons.
To receive DTC's complete report, please contact me:
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.
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THURSDAY, April 18, 2013
Peabody Energy (BTU) was the first U.S. coal producer to release Q1 results and the market reacted very favorably, sending BTU shares 7.57% higher on the day. Better than expected cost performance in Australia was one key reason for beating the Street’s estimates, but the company pointed to markedly better U.S. steam coal fundamentals and a gradually improving international marketplace as additional reasons for optimism through 2013. Below are some key takeaways. Contact
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if you’d like DTC's complete analysis of Peabody’s Q1 2013 earnings!
- Spot Coking Coal Weakness Not a Reason for Concern: Despite reports of spot coking coal prices around $150/MT, CEO Greg Boyce does not think these prices are sustainable. Spot volumes are much less significant than quarterly contracts. Buyers are in relatively good shape with their contracted volumes and until Japan and Korea return to the market or growth in China and Europe accelerates, there will likely be variability in spot pricing. Quarterly pricing focuses much more on market fundamentals and price levels needed to sustain supply.
- U.S. Utility Demand Rebounds: BTU expects a 60 – 80 mm ton YoY increase in 2013 utility consumption, which will put inventories at the normalized range toward the end of the year. PRB and Ill Basin are the best positioned regions. Utilities will likely need coal for the back half of 2013 and contracting for 2014 will likely start towards late summer.
- Potential to Ramp up in PRB: Output in the PRB will not be able to significantly ramp up if there is a sudden improvement in pricing. Phase 1 of increasing production entails resuming overtime and operating current equipment at higher utilization rates. To see a more significant increase in output, Phase 2 would require producers to bring back idled equipment, which will need repairs and capital. Naturally rising strip ratios in the PRB will also delay a ramp up.
- Cautious 2013 U.S. Export Forecast: Peabody expects a 25 mm ton YoY decline in exports (15 mm met and 10 mm thermal). Q1 shipments benefited from sales contracts that were already in place but the company is already seeing a dramatic fall in shipments.
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FRIDAY, April 12, 2013
It’s that time again! The start of another quarter is our cue to begin mine by mine production searches as reported to MSHA (Mine Safety and Health Administration) by coal producers. Unlike the EIA, which issues estimates for production, MSHA has definitive data that gives us an idea of what the coalcos will announce in upcoming earnings releases. DTC has worked tirelessly to develop one of the most comprehensive MSHA databases in the business, allowing us to analyze production on a: 1) mine by mine basis; 2) regional basis; and 3) public vs private basis. From this valuable information, we are able to determine how producers performed in the most recent quarter compared to previous quarters. It gives us a window into whether a miner or a single mine is outperforming, hitting targets or struggling.
How does this benefit our clients? First and foremost, we do all the leg work, digging through hundreds of MSHA IDs to gather the production as soon as it becomes available. We review it with our fine-toothed DTC comb to ensure that it is correct, then add commentary that will help you understand the how and the why. Production figures can help to predict a coalco’s quarterly mining costs, shipments and therefore earnings. Having high level MSHA production data prior to earnings season can provide a crucial market edge, providing you the opportunity to make informed decisions before the public coalcos report quarterly results.
In fact, we just sent our first MSHA Q1 2013 Flash to clients today. Here’s a peek of what we sent out:
ARLP: 100% of Capp, 61% of Napp and 20% of ILB mines have reported.
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Alliance Resource Partners (ARLP)
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Quarterly Coal Production (Source: MSHA)
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(100% of Capp, 61% of Napp and 20% of ILB mines have reported)
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Q1 2013
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Q4 2012
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% Change
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Q1 2012
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% Change
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Capp
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551,302
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426,875
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29.15%
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496,220
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11.10%
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Napp
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796,260
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818,337
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-2.70%
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126,400
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529.95%
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ILB
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1,653,654
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1,490,600
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10.94%
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1,368,646
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20.82%
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Total
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3,001,216
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2,735,812
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9.70%
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1,991,266
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50.72%
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Note: Sequential & YoY comparisons include only those mines whose production have been posted by MSHA for Q1 2013
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ARLP is scheduled to report Q1 Earnings on April 26th.
DTC's Comments:
- Capp: 100% of Capp production has been reported for Q1 and the 551K tons are up 29.15% seq and 11.10% YoY. A good portion of the boost came from increases at the Van Lear mine’s strongest quarter in over a year (242K tons, up from 98K tons seq and 221K tons YoY) and Mine #4 (130K tons, up from 80K tons seq and zero YoY)
- Napp: Tunnel Ridge is the only Napp asset to report with 796K tons, down 2.70% seq but up a healthy 529.95% YoY. We heard market chatter about production issues at the mine in Q1, but they do not appear to be major. Q2 2012 was the official startup of the longwall at the mine, so we would expect to see YoY comps improve going forward.
- ILB: Only a couple ILB mines reported this week so we will hold off making comments until we have a better picture of what the region looks like for Q1.
If you want to see more or are interested in learning about DTC’s MSHA coverage, please contact DTC’s Director of Client Services,
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.
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FRIDAY, March 29, 2013
Investors of all backgrounds and interests are circling the coal equities, waiting for a rebound that could lead to ‘once in a lifetime gains’. Recent interest is centered around the pending proxy battle as Julian Treger, Managing Director of Audley Capital, has taken an activist approach and seeks to win support for 5 seats on the Board of Walter Energy (WLT). I sat down with Julian this week, to get color on his plans to WLT, should his slated nominees be elected, and to get answers on questions much of Wall Street has been pondering. For answers to the questions below, contact
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and ask for a copy of the interview!
- How do you view coal equities as an investment at the moment?
- If now is the time to add exposure to the sector, why do you own “less than one-tenth of one percent” of WLT, as reported in company filings?
- How can you differentiate the actions of the Board from declining coking coal prices, as reason for the falling share price?
- Many investors point to poor performance at WLT’s assets in Western Canada, which the company got in the acquisition of Western, as a primary reason for disappointing earnings and their declining share price. You helped orchestrate that transaction. Why should investors listen to you now?
- How did you pick the individuals you have nominated, and why do you think they can better manage the company than current directors?
- You publicly encouraged a sale of the company in 2011. Why did you wait until 2013 to nominate Board members?
- If your nominees are elected, how will you change the company in a way the current Board will not?
- Do you think investor activism is warranted in some of the other U.S. coal companies, or are they doing the best they can with the hand they have right now?
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THURSDAY, March 28, 2013
Clairvoyant? Not quite- but DTC does boast one of the most complete MSHA databases (outside of MSHA itself) that allows us to predict with relative certainty how the EIA will revise its quarterly production estimates. Based on MSHA submissions for the Q4 2012 quarter (99.92% of mine data), DTC expected total U.S. coal production to be revised downward by 3.94 mm tons vs EIA’s actual downward revision of 4.05 mm tons. However, it is more important to look at regional changes (continue reading below).
The EIA constructs its estimates largely based on railcar loadings, which opens the door for varying degrees of accuracy and therefore the need to issue a revision. This is due to: 1) whether shipments were made from stockpiles vs production; 2) differences in the transportation mix (rail, barge, truck, conveyor, etc); and 3) disparities between estimated and actual railcar weight.
Below are the EIA’s revisions by region, compared to DTC’s estimates:
| EIA Q4 2012 Coal Production Revision |
| Region |
EIA Revision |
DTC Estimate |
| Capp (VA, SWV, EKY) |
downward by 8.44 mm tons |
downward by 8.26 mm tons |
| Napp (PA, OH, NWV, MD) |
downward by 0.66 mm tons |
downward by 0.53 mm tons |
| PRB (WY, MT) |
upward by 2.86 mm tons |
upward by 2.87 mm tons |
| ILB (IL, IN, WKY) |
upward by 0.46 mm tons |
upward by 0.46 mm tons |
| AL |
downward by 0.51 mm tons |
downward by 0.51 mm tons |
| Uinta Basin (CO/UT) |
upward by 0.27 mm tons |
upward by 0.11 mm tons |
| West (NM, AZ) |
downward by 0.01 mm tons |
downward by 0.01 mm tons |
| Other |
upward by 1.46 mm tons |
upward by 1.39 mm tons |
| Source: Energy Information Administration and Mine Safety and Health Administration |
In addition to the above data, DTC’s clients receive further analysis and commentary on the regional revisions, including whether they are bullish or bearish indicators. If you are interested in receiving DTC’s top-notch coal research, please email
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, Director of Client Services, for a complimentary trial.
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FRIDAY, March 22, 2013
On Wednesday, we reported BHP/BMA settled Apr – Jun quarterly business with Nippon Steel at $172/MT FOB Queensland for premium Peak Downs coking coal. The settlement is in-line with recent expectations for a deal between $172 and 174/MT, and is $3/MT lower than DTC’s estimate of $175/MT.
- First Benchmark Increase in 9-Months: This was the first price increase since Jul-Sep 2012. A $7/MT increase is better than nothing. As we reported last week, negotiations had stalled with a spread between Nippon Steel’s bid at $168 – 170/MT and BHP’s offer price of $174/MT. They pretty much ‘split the difference’, which is better than BHP having to ‘hit’ the $168/MT bid.
- Discounted Coking Coal Qualities: The price for the next tiered quality (BHP’s Goonyella) only had a $3/MT ‘haircut’ from the benchmark versus the $5/MT discount in the Jan-Mar quarter. Furthermore, we’ve heard that several cargoes of spot coal of the Goonyella-type quality were booked into India in the $170-$173/MT range. This is important because the various coking coal qualities sold outside of the Japanese market typically settle at an additional discount, but this was not the case. It appears as if the spot market is at a premium to the benchmark even outside the Japanese market, which indicates the presence of sufficient demand (or insufficient supply).
- Atlantic Basin Discount Remains Wide: As the PCI spreads are narrowing in the Asian market, so are the spreads between the Australian benchmark and the US premium coking coals. Unfortunately, the spreads between the premium-grade US coking coals and the marginal US qualities remain wide. I have heard talk that the Japanese mills were in the process of tweaking their coke oven blends in order to allow them to use some more of the lower-priced US coals. This might tighten the spreads a bit, but we are miles away from the ultra-bullish scenario where the US premium coking coals are at parity with Australia and the Asian buyers have to absorb the considerable ocean freight differential. Europe and Brazil would have to rebound along with some supply disruptions elsewhere for that to happen.
If you are interested in receiving DTC’s research in ‘real time’ (FYI- DTC’s clients received news of the benchmark settlement delivered direct to their Inbox on Wednesday morning at 7:15 am EST), please contact
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, Director of Client Services (+1.970.241.1510).
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