Five coal mines could dictate the overall increase in U.S. metallurgical coal production in 2018, but two of the operations have struggled with geologic challenges and two are still in early development, analysts say.
Seaport Global Securities LLC's Mark Levin and Nathan Martin said in a March 19 note that mines owned by ERP Compliant Fuels subsidiary Mission Coal, Alpha Natural Resources Inc. and Ramaco Resources Inc. could be the most important indicators for predicting the direction of pricing for the commodity.
Mission Coal owns three of the mines named in the Seaport note — Oak Grove in Alabama, and Pinnacle and Maple Eagle in West Virginia. Its CEO, Mike Zervos, said in August 2017 that Oak Grove and Pinnacle are expected to increase output to peak levels this year after a July 2017 roof collapse at Oak Grove that resulted in a force majeure and a longwall move away from a coal face full of geological faults at Pinnacle.
Oak Grove, which produced 1.4 million tons of coal in 2017, according to the U.S. Mine Safety and Health Administration, is targeting 2.3 million tons this year, Seaport said, while Pinnacle expects 2.7 million tons, up from 1.2 million the previous year.
Mission Coal expects Maple Eagle to expand to 2.2 million tons in 2018 due to increased operations in new sections, compared to 653,251 tons in 2017.
"Whether privately held Mission is successful could play an important role as to what U.S. met prices look like this year," Levin and Martin said.
The ramp-up of Ramaco's Elk Creek complex and the development of Alpha's Workman Creek conveyor project, both in West Virginia, could combine with the Mission Coal assets to inject about 6 million tons into total U.S. yearly metallurgical coal production. Ramaco is guiding to production and sales volumes of 2 million to 2.2 million tons for 2018, according to a preliminary earnings report, and Alpha guided to met sales of 6.8 million tons to 7.8 million tons for the year.
The increase could be absorbed by higher domestic demand driven by the 25% tariff President Donald Trump imposed on steel — one Ramaco executive has said tariffs would have an overall positive impact on domestic metallurgical demand.
However, more recently, Ramaco's executive chairman worried about "unintended consequences" of the tariffs, while Alpha's CEO recently told S&P Global Market Intelligence that a lack of clarity on which countries may be exempted from the tariff makes the benefits for U.S. producers unclear. The bulk of U.S. metallurgical coal production is exported to overseas markets, which could see lower demand if the tariffs trigger a trade war.
Benjamin Sporton, CEO of the World Coal Association, told S&P Global Market Intelligence that the tariffs will likely bring short-term benefit to the industry, but in the long term, "it's very difficult to tell what the net impact is." He also said that if domestic demand from steelmaking doesn't absorb the extra tons, foreign demand likely could.
Seaport noted that China will play a major factor.
"When its steel companies are profitable, it's usually good news for the entire coking coal complex," the analysts said, because high steel margins generally mean an improved demand for higher-quality coking coals.
Sporton said the Asian industrialization and urbanization story has led to a strong demand for steel that recycled metals alone cannot meet.
The Seaport analysts presented four different scenarios for 2019 coal equities that indicate they believe the March 16 spot price of $217 per tonne on the S&P Global Platts premium low-vol index is about as good as it gets.
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.