Arch Coal Inc (ACI), ArcelorMittal (ADR) (MT): The Met Coal Industry Isn’t Just Playing Dead

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Arch Coal Inc (NYSE:ACI)Companies like Arch Coal Inc (NYSE:ACI) had touted metallurgical coal as their darling savior, but the industry must face a deceptive truth: increased steel demand won’t equal increased met coal prices. That spells big trouble for the met coal market, and American producers in particular.

Metallurgical coal is a main component in producing steel, and steel demand is expected to grow by 3% this year, according to steelmaking giant ArcelorMittal (ADR) (NYSE:MT). But the expected increase in steel production worldwide isn’t going to help the met coal industry. Increased steel demand in 2013 is weak, according to the National Development and Reform Commission in China, and supply there will continue to outstrip its slight increase in demand. Why continue oversaturating the market with cheap steel?

China’s steelmakers are stalling for time, and are betting on high production to keep up their bank credit lines and market share. The effect is that steel prices have dropped rapidly and many producers are seeing losses, as China grows its exports and steel piles up worldwide. In nine of the past 10 quarters, the country’s economy has slowed. The 86 steel mill members of the China Iron and Steel Association saw losses totaling $109 million in June, even as 31 new smelters started or finished up construction in first quarter 2013.

The country’s steel production is not expected to slow while steel mills are still bringing in small profits. Steel supply and met coal demand will remain artificially inflated by China, at a low price, and that could impact the market for years to come.

Who is Buying More Met Coal These Days?

By 2017, India forecasts that its metallurgical coal needs will double, requiring another 47 million metric tons. British Columbia produces 24 million metric tons of met coal annually, but sits on an estimated 13 billion metric tons.

India’s steel minister led a delegation that recently met with British Columbia Premier Christy Clark and other representatives, and the two groups signed a letter of intent promising joint research and cooperation.

Supply isn’t the only positive that steelmakers see in British Columbia, as much of Canada’s coal is shipped worldwide from the province’s convenient ports. Coal exports aren’t directly handled through any ports within the Vancouver city limits, but the City Council there still voted to ban all future coal handling, storage and trans-shipment from its ports. One council member said the measure was taken as a response to demand for shipping American coal, to curtail any pending or future plans for new ports.

Giant Coal is Faltering

The world’s two biggest met coal producers are British Columbia-based Teck Resources Ltd (USA) (NYSE:TCK) and Australia’s BHP Billiton plc (ADR) (NYSE:BHP). Both are showing major signs of struggle, as Teck’s quarterly report noted that coal prices are down 23% since same quarter 2012.

BHP Billiton plc (ADR) (NYSE:BBL) decided recently to continue operating its Gregory Crinum mine in Australia, after failing to sell the mine. Estimates of the mine’s worth are in the $400 million range, and now analysts worry that other BHP properties up for sale will meet the same fate. Their greater concern is that miners as a whole will be unable to find property buyers.

BHP Billiton plc (ADR) (NYSE:BBL) isn’t in a steady financial position. The company has cash reserves totaling $5.3 billion at year’s end 2012, but its long-term debt is up to $31.8 billion. The Crinum mine fiasco may leave some investors wondering about the giant’s future cash flow.

Teck Resources Ltd (USA) (NYSE:TCK) had reported plans to reopen a mine in British Columbia; several companies own other met mines in the province, including Walter Energy, Inc. (NYSE:WLT) and Anglo American. But with current prices, Teck is cutting costs and slowing its mine reopening. The company’s revenue was $197 million for second quarter 2013, compared with $398 million in the same quarter 2012. It hopes to reduce costs by $300 million and so far has cut $220 million.

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