Benchmark coking coal prices are down 56% from a quarterly price of $330 per metric tonne in mid 2011 to $145 per tonne for the July-Sept, 2013 period. This depressed level is widely believed to be below the marginal cost of production of roughly $175-$185 per tonne. However, spot prices have been below that level for quite some time, suggesting that the true marginal cost might be closer to $150 – $160 per tonne.
One thing that’s certain, U.S. coking coal production is in dire straights at a global benchmark price of $145 per tonne. In the U.S., Walter Energy, Inc. (NYSE:WLT) is most exposed to coking coal prices, followed by Alpha Natural Resources, Inc. (NYSE:ANR), Arch Coal Inc (NYSE:ACI), CONSOL Energy Inc. (NYSE:CNX) and Peabody Energy Corporation (NYSE:BTU).
U.S. Coking Coal Producers Falling Back to Swing Producer Status?
In 2010-11 there was great excitement as stronger global coking coal prices allowed U.S. producers to make a mark in the seaborne market. Prior to that, the U.S. industry was a swing producer, i.e. only a meaningful factor when coking coal prices spiked like they did in 2008. By mid 2011, most coking coal players believed the U.S. would continue to be a top producer and exporter and no longer a swing producer.
All of that changed when coking coal prices fell below $200 per tonne in 2012. The U.S. needs $200 per tonne pricing to be relevant. Some analysts and stakeholders believe that coking coal prices will bounce back significantly in the next 6-9 months. That appears unlikely. Unless there is an exogenous event, such as severe flooding in Queensland, Australia, coking coal prices are probably stuck below $200 per tonne.
Australia Reasserts its Power in Coking Coal
Queensland, Australia accounts for more than half of the global seaborne coking coal market. In recent years, the U.S. had been taking market share. Walter Energy, Inc. (NYSE:WLT) has capacity to export up to 12 million tonnes and Alpha Natural Resources, Inc. (NYSE:ANR) twice that amount. However, Australia, led by BHP Billiton Limited (ADR) (NYSE:BHP)‘s BMA Alliance, is not making it easy for U.S. producers. BHP Billiton Limited (ADR) (NYSE:BHP)’s coking coal costs are lower and its average quality higher.
Despite global prices down 56%, BHP and others in Australia such as Anglo American plc (LON:AAL) continue to produce full speed ahead. Alpha Natural Resources, Inc. (NYSE:ANR), with about two thirds of its coking coal being premium hard coking coal like the coals from Australia, has production costs well above Australia’s. Alpha Natural Resources, Inc. (NYSE:ANR) and U.S. peers would be largely shut out of the searborned market if not for railroads cutting freight rates by $20-$25 per tonne. Alpha Natural Resources, Inc. (NYSE:ANR) needs $200 per tonne to thrive, but BHP and Anglo American plc (LON:AAL) can make hay at lower prices.