Met coal feeding power plants as thermal coal price spikes

Metallurgical-grade coal, produced by companies such as Ramaco Resources at its Berwind mine in the U.S., is finding its way into thermal markets as prices for the two products converge.
Source: Ramaco Resources Inc.

Prices for thermal coal and metallurgical coal have converged, upending industry norms and pushing producers of met coal to sell some of their product to electricity generators.

Global coal supplies are tight after countries such as Europe stopped buying Russian coal after its Feb. 24 invasion of Ukraine. The situation has been exacerbated by high natural gas prices, leading to an energy shortage in Europe with the continent's power producers scrambling for fuel. Logistics constraints, relatively little capital spend in the coal sector and other factors have also pumped up thermal coal prices.

S&P Global Platts' High Vol B Coking Coal FOB US East Coast pricing benchmark was assessed at $243 per tonne Aug. 8, just $1.80/t higher than Platts' Thermal Coal FOB Hampton Roads 6000 kcal/kg NAR price assessment. A year earlier, the same benchmarks were more than $70 apart even though prices for the met coal used in coking ovens to produce steel were not historically very high. At one point in March when the U.S. East Coast met coal benchmark spiked to $465/t, thermal coal from Hampton Roads was priced more than $283/t lower.

A similar pattern has emerged globally, including with benchmark pricing out of Australia, a significant source of global coal supplies. Seaborne coal supply is likely to get even tighter with Europe's ban on Russian coal kicking in Aug. 10. As a result, some producers diverted tons typically sold into the steel supply chain to electricity generators willing to pay higher prices.

"We're faced with a very unusual circumstance where thermal coal is higher than even the lowest quality of met coal, which is usually a very unstable circumstance, one that I've really never seen last very long at all," Coronado Global Resources Inc. CEO Garold Spindler said on the company's Aug. 8 earnings call. "But this one seems to have legs."

US met coal producers jump back to thermal markets

Arch Resources Inc. COO John Drexler said the company recently booked a fourth-quarter shipment of high vol B met coal to Europe for use as a thermal product from its Mountain Laurel mine in West Virginia at "substantially above" benchmark prices.

Arch Resources, formerly known as Arch Coal, has rebranded itself over the past few years as it focuses more on selling metallurgical coal and winding down its thermal coal operations. However, higher thermal coal prices have led to increased thermal coal sales this year and prompted the St. Louis-based company to sell its metallurgical coal into new markets.

"Don't get us wrong. We're not changing into a thermal coal producer," Drexler said on a July 28 call. "But in our met segment, we do plan on taking advantage of what we see with the dislocation currently, which we think over time could put more pressure into the markets."

Alpha Metallurgical Resources Inc., which mines coal in Virginia and West Virginia, has seized the current market dynamic to sell its steelmaking coal into thermal coal markets.

"Thermal coal indices have jumped higher than even the highest quality met coals, inverting what has historically been a predictable pricing hierarchy," Alpha COO Jason Whitehead said on the company's Aug. 8 earnings call.

The pricing shift has also allowed some companies to ramp up thermal coal production. For example, Alpha had been shedding its thermal coal assets and focusing on met coal customers, given declining U.S. thermal coal demand. Now, the company is resuming production at one of its surface mines to produce nearly half a million tons of thermal coal through 2023.

In addition, one Alpha executive said on the company's earnings call that the "radically changing economics" of thermal coal have increased the reserve life at its underground Slabcamp mine. Overall, the company bumped its thermal coal guidance from between 800,000 tons and 1.2 million tons in 2022 to a guidance range of 1.2 million to 1.4 million tons.

'Confusion breeds opportunity,' Ramaco says

U.S. metallurgical coal producer Ramaco Resources Inc. is also reporting success moving its metallurgical-grade coal into thermal coal markets.

"We placed a sale a few weeks ago to a European thermal buyer at a price well north of met," Ramaco founder, Chairman and CEO Randall Atkins said on the company's Aug. 9 earnings call. "This may turn out to be a very interesting fall."

Atkins said time will tell if domestic steel customers adjust to the current pricing dynamic. In the meantime, the Kentucky-based producer formed in 2015 to focus on met coal supply is looking to place tons into whichever market offers the highest margin. However, Atkins added that these global coal market dislocations are unlikely to be resolved soon.

"Despite the backdrop of recessionary economic sentiments, all this could lead to the same form of price volatility that we witnessed earlier this year," Atkins said. "From our vantage, we feel perhaps confusion breeds opportunity."

'Palpable supply-demand imbalance'

The timing of the price shift has bolstered metallurgical coal producers at a time when slowing economic growth has pressured steelmakers to pull back on production. With new metallurgical coal resources relatively hard to come by in today's market, the crossover of tons into the thermal market may help keep prices for met coal buyers higher as well.

"Looking ahead, we expect that record seaborne thermal coal prices will backstop met coal prices, especially as volume commitments to steelmakers start rolling off during the fall," B. Riley Securities analyst Lucas Pipes wrote in an Aug. 8 note.

Jason Fannin, Ramaco's chief commercial officer and chief marketing officer, also noted the potential for higher thermal coal prices to continue supporting strong met coal pricing.

"There remains a palpable supply-demand imbalance," Fannin said. "This overall imbalance is predicated by structural underinvestment in the entirety of the coal sector."

Some producers are not optimistic that the thermal coal market will continue to offer crossover opportunities for metallurgical coal for much longer, though they want to take advantage in the meantime.

"It is nearly unprecedented to have thermal coal trading at a premium to coking coal, and we don't expect that to last," Arch President and CEO Paul Lang said.

Obstacles to broader shift

The opportunities to divert tons are somewhat limited.

Metallurgical-grade coal has different characteristics, including varying heat content, volatile matter, sulfur content, ash levels and expansion properties. As a result, only some customers can accommodate the technical challenges of using met coal in applications that generally call for thermal coal.

Peabody Energy Corp. President and CEO James Grech said the company would honor its commitments under contract but is looking for incremental or uncommitted tons to ship into thermal markets.

"We just can't take all of our metallurgical coal and then switch it over to the thermal market," Grech said on the company's July 28 earnings call. "If we could just flip the coal into the thermal market, that would be great, but [we've] got to find specific markets that can handle our coal quality. It takes a little bit of time to do that."

Producers are also aware that the new demand is likely ephemeral compared to its typical customer base. Paul Flynn, CEO of Australia-based Whitehaven Coal Ltd., said the company is not indulging many new customer inquiries despite the "real strange phenomenon" going on with coal prices. Instead, the company is focusing on supplying its regular customers.

"We do have important customers who obviously acknowledge that there is obviously a spread that is quite inexplicable at the moment," Flynn said on the company's July 17 earnings call. "So, we are looking at alternate pricing scenarios in terms of how we can still meet them, allow them to meet their requirements, and then, obviously, achieve a sensible outcome financially for us."

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