Mon, October 2, 2017 10:03 am

Platts Coal Marketing Days/Pittsburgh: Gary Smith attended the 40th annual Platts Coal Marketing Days conference in Pittsburgh, PA. With over 150 attendees, the conference mood was upbeat. Below are the key takeaways:

  • Robert Simons of ReedSmith opened the venue with remarks around the positive impacts the current administration is having on industry: the addition of Judge Gorsuch (whose position on the Chevron deference versus Merritt Garland will benefit coal rulings) to SCOTUS; rolling back CPP and keeping coal plants on line for grid reliability; providing relief on the regulatory front; emergences from bankruptcy aided by the leveraged loan business. The concern is “can the coal industry take advantage of this second opportunity?”
  • David Stetson CEO of Alpha Natural Resources gave a presentation on its financial position and talented business team. A year ago Alpha was regarded as a reclamation company, but it has excellent met coal, stable operations, 18 mines, produces 14 mm tons per year (about half met) with over 700 mm tons of reserves. Stetson reported they could easily increase met coal production by 2 mm tons without significant capex, but it depends on market conditions and “we are comfortable at the level we’re at.” Alpha sells its met production to Contura, with thermal coal sold directly to customers going where it gets the best net back. About 1 mm tons of thermal coal goes export. Four large capex projects underway include Road Fork 52; Workman Creek; Black Eagle/Marfork; and Panther Eagle. The Lexington Coal transaction that Alpha is completing will transfer 260 permits and bonding obligations and will further strengthen the Alpha balance sheet. David remarked to an audience question that he doesn’t see self-bonding in the coal business going forward.
  • A metallurgical coal markets panel included Arcelor Mittal; DTE Energy; Contura, Blackhawk and Corsa. North American and international coal procurement trends like supply chain cost optimization, contingency supply options, tracking rail performance, data driven decisions that preserve strong vendor relationships. The panel noted that they haven’t seen the uptick in infrastructure and building demand that was anticipated, but the consensus believes it’s coming. World steel markets are experiencing a demand led recovery. North American steel markets have stabilized at profitable levels. Commodity cycles seem to be coming quicker and are more amplified due not to true supply and demand but perhaps due to hot money flows from traders and funds around the world awash in cheap (near zero % interest) money. The bottom line offered up by the panel is that recent price uplift in coal is demand driven versus previous spikes driven by supply issues. US met coal production increases are limited by skilled available labor, new permits and lack of long-term agreements which limit capital investment and new developments.
  • Kurt Fowler of The Steel Index covered steel markets. Capacity in US is about 75%, up from 68% in 2016; globally it is 73%. The HRC metric is above $600/ton, scrap metric is $316, with Turkish scrap imports (the bell weather) is $320/ton. Finished steel demand is strong domestically with strong utilization and protected markets helping to sustain demand. End use markets (appliances, shipbuilding, defense, equipment, autos, renewables, agricultural) are all positive. Scrap prices for October expected to be lower. Coking coal prices are expected to retain volatility, with supply side market issues and government policy impacts.
  • Jack Porco President and CCO of Xcoal provided an outlook of international coal exports with a focus on the role of the US. US coal consumption is up 35 mm MT and production is up 48 mm MT. The global seaborne market represents 1.2 BB MT with US 3% of the thermal trade, and 15% of the met trade. Total US exports are expected to be up 50 % YOY to 80 mm MT. Approx. 5% of US thermal coal will go to export, while 75% of US met coal will go export. US supply to the Atlantic basin will increase despite lower demand as growing Pacific demand is satisfied by Colombia, Russia and S. Africa. “We are in an improving price market for thermal coal.” At $80 for API 2, US is in play … at $90, CAPP comes into play. Jack pointed out that it is important to watch prices for PCI which are improving and offer a barometer to coal prices. The benchmark system is dead, as index pricing is driving deals now. The surge in short term prices may mislead the understanding on longer term fundamentals.
  • In the coal versus natgas session, it was noted that the 2017 generation mix may look like this: 34% coal, 20% nuclear, 15% for wind solar, hydro and bio, 0% for oil and 31% for natgas. Natgas prices remain relatively stable despite shrinking surplus. Through 2022, 22.5 GWs of coal is expected to retire and 3.4 GW of nukes are expected to retire. The key metric to all forecasts is the price of electricity – if it is low, then the pressure on coal continues, but if it is higher (with corresponding rise in natgas prices) then the pressure on coal abates. Longer term it’s clear that natgas can make up for pending retirements, unless the spike in electrify demand translates to higher prices for the entire value chain.