Investors sold off large amounts of equity in some U.S. coal producers in May, resulting in double-digit drops in share prices despite little change in metallurgical coal pricing, according to a recent investor note.
Seaport Global Securities LLC analysts Mark Levin and Nathan Martin wrote in a June 4 note that May was a "brutally tough month for coal equities." Peabody Energy Corp.'s shares fell 18%, Warrior Met Coal Inc.'s fell 17%, Ramaco Resources Inc.'s dropped 16%, and Teck Resources Ltd.'s decreased 14%, according to the note. Arch Coal Inc.'s share prices dropped 9% and Contura Energy Inc.'s sank 7% during the month, while the S&P 500 fell 7%.
Year-to-date, Peabody's equity dropped 22%, Contura's decreased 20%, Consol's fell 16%, and Teck's dropped 4%, while the S&P 500 has increased 9% over the period, the analysts wrote. Meanwhile, Ramaco's equity is up 10% so far this year, Warrior's increased 8% and Arch's grew 5%.
Seaport predicted that investment activity within coal producers through June will depend largely on macro developments, especially relating to trade. It also forecast that coking coal prices will continue to decline throughout the month.
"Without any positive news flow, concerns about slowing growth will likely continue to overwhelm any industry-specific factors, at least over the near term," Levin and Martin wrote. "Right now, many investors either aren't involved or are betting against certain names in the space."
Moody's wrote in a May 31 report that while its outlook for coking coal is more favorable than thermal coal, metallurgical coal prices are expected to "remain volatile over a longer horizon." Moody's revised its outlook for the European steel industry to negative late in May due to expected challenges from slowing economic growth and weaker end markets, particularly the auto sector.
"While thermal coal production is in long-term secular decline amid continued switching by utilities, met coal fundamentals are stronger, with generally stable conditions in the global steel industry, and very modest recent investment in new met coal capacity, which might otherwise have diluted commodity prices," according to the report.
CSX Corp. President and CEO James Foote said at a May 30 conference that the railroad's coal business is performing better than expected so far this year. An increase in industrial and metallurgical coal shipments helped offset some of the lag on the thermal export side, which is largely shipped to Europe.
Coking coal pricing in the Atlantic Basin appears to be weakening as demand decreases, and the Australian low-vol price has also dropped by about 4% in the last three weeks, according to Seaport. Weakening global steel prices and increasing iron ore prices have also put pressure on steel margins recently. Current U.S. hot-rolled coil steel prices are below $600/ton, a 37% year-over-year decrease.
"Whether this weakness is temporary remains to be seen, but there are definitely more reasons to be concerned than a few months ago," Levin and Martin said. "To be clear, India, Vietnam and several other Southeast Asian countries are bright spots, but the worry is that they won't be able to escape a major global economic slowdown were it to occur."
However, coking coal stocks are cheap, most companies can generate free cash flow despite lower prices, and many producers' balance sheets are the strongest they have been in decades, they said.
The global seaborne coking coal market has "remained as resilient as at any point in the last decade," MKM Partners LLC executive director Daniel Scott wrote in a May 24 note. Strong demand and a slow supply response from Australia, the U.S. and Canada have helped keep the market tight. The 10-year average benchmark price is near the current price, and Scott said the longer pricing remains near those levels, the more likely it is to be considered the new normal.
MKM raised its benchmark coking coal price assumptions through 2020, increasing its second-quarter 2019 assumption to $200/t free on board, up from $180/t. Scott projects that pricing will dip to $180/t in the third quarter and $175/t in the fourth.