US met coal miners expect supply cuts as low prices weigh on balance sheets

Large US coal miners are reining in costs and expect peers unable to reduce expenses to get pushed out of the market as the industry awaits a reversal of the currently weak metallurgical coal market.

Low steel demand, exacerbated by recent uncertainty around global trade policy, weighed heavily on the companies that dig up metallurgical-grade coal. Platts, part of S&P Global Energy, assessed the High Vol A Coking Coal FOB US East Coast benchmark price at $172/mt on May 14, down 42.7% from the two-year high of $300/mt in October 2023.

The strained market has the industry, which has seen multiple waves of bankruptcies over the last decade -- including one largely driven by unexpectedly weak metallurgical coal markets -- carefully watching costs as they wait for market improvement.

"Producers unable to manage costs effectively are undergoing material financial strain," said Jason Fannin, chief commercial officer at Ramaco Resources on a May 12 earnings call. "If current conditions persist, we anticipate a further wave of supply cuts that could help improve the market."

Ramaco CEO Randall Atkins said on a May 12 earnings call that China's overproduction of steel and sales of the material below market prices are disadvantaging steelmakers in other countries. Ramaco reported a net loss of $9.5 million compared to net income of $2 million in the prior year.

"Unfortunately, this is the same theme we have mentioned for the past few quarters. It's also a reality that may continue to be with us until there is a rebalancing in the world steel markets," Atkins said.

Lower prices have struck the industry despite challenging weather conditions in metallurgical coal regions and several unscheduled outages in production, limiting supply. For example, some shipments faced delays after flooding hit Kentucky in mid-February. There have also been unexpected events at several mines, including a fire at Core's Leer South mine, where the company continues to aim to restart that mine.

Lower prices pressure balance sheets

Several other metallurgical coal-focused producers took a financial hit due to lower prices in the recent quarter.

The newly formed Core Natural Resources, a merger completed earlier this year between Consol Energy and Arch Resources, reported a net loss of $69.3 million in the quarter. Alabama metallurgical coal producer Warrior Met Coal reported a net loss of $8.2 million in the recent period compared to net income of $137 million in the first quarter a year ago as its net selling price for metallurgical coal fell 41.9% year over year to $135.79/st in the first quarter.

Executives from Alpha Metallurgical Resources, which reported a Q1 net loss of $33.9 million compared to net income of $127.0 million a year ago, cut production at its higher-cost mine, reduced wages and lowered its annual sales volumes and capital expenditures in recent months.

"While the indices have been moving slightly higher in recent weeks, isolated circumstances are most likely influencing these movements higher," said Daniel Horn, Alpha's executive vice president and chief commercial officer in a May 9 earnings call. "The broad macroeconomic factors that underpin metallurgical markets, like steel demand and economic growth, continue to show weakness."

That means tonnage is likely still being shipped into the market that will need to come offline, Horn added. Alpha CEO Andy Eidson said there is a question of how much longer less well-capitalized companies can last without consuming their remaining liquidity.

There have already been multiple US coal bankruptcy cases in the past several months, including filings from Corsa Coal, Heritage Coal & Natural Resources, Coking Coal and White Forest Resources. However, bankruptcy filings do not necessarily result in steep production cuts, as a company can sell its assets or restructure its balance sheet and keep production going.

"Mine output remains constrained by years of underinvestment, ongoing degradation and depletion of the global reserve base as well as continuing regulatory pressure," said Core CEO Paul Lang on the company's first quarter earnings call.

"Moreover, current pricing levels appear to be inducing supply rationalization among high-cost producers, not only in the US but globally, which should act to support a healthier supply-demand balance over time."

More than 100 million mt of seaborne metallurgical coal production -- equal to about 30% of the market -- is underwater based on spot prices observed in March, according to Malcolm Roberts, chief marketing officer of Peabody, in a May 6 earnings call.

"This suggests supply will come out of the market and support a recovery in prices. Almost on cue, we've seen prices rebound modestly from the March low, and we'll see what traction that gains," Roberts said.

It could prove tough to tame the oversupply situation without a significant uptick in demand. Even if production comes offline, several large US miners have new supply projects waiting in the wings.

Ramaco's Atkins said the company could increase its production by 2 million st/year once it sees "long-term market clarity." That production could come online in 24-36 months after greenlighting projects.

Alpha is developing a new low-volatile metallurgical coal mine, Kingston Wildcat, in West Virginia, that it plans to continue despite lowering its capital expenditure guidance. Warrior is developing the Blue Creek metallurgical coal mine in Alabama. It could bring about 6 million st/year of met coal to market once it is ramped up, Warrior CEO Walt Scheller noted on the company's earnings calls.

Outlook gloomy

The near-term future of metallurgical coal pricing is not bright.

Leasing company Natural Resource Partners expects weak prices for its key commodities, including metallurgical coal, "to persist for the foreseeable future and provide a drag on our performance," Craig Nunez, president and COO, said in a May 6 earnings call.

Alpha's Eidson said that without a "significant event or boost to global economic activity," the metallurgical coal market will continue to be tough and warrant a cautious outlook.

Warrior CFO Dale Boyles said the Alabama miner expects the global steel market to face challenges for the rest of the year.

"We also expect the recent [unscheduled production outages] to cause temporary tightness in the steelmaking coal availability, which would lead to slightly higher prices compared to the previous quarter," Boyles said. "But until there's a meaningful change in the global steel market fundamentals, it is unlikely that steelmaking coal prices will return to their previous levels."

However, some producers see some hope in Indian steel capacity coming online and offering some price relief later this year.

"It has been our view that the second half will be stronger ... With blast furnaces in India coming online, we continue to see India taking over the growth in global metallurgical coal demand in the coming years," Roberts said.