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Met coal producers proceeding cautiously, tout strengths amid volatile market

Several U.S. metallurgical coal miners are proceeding cautiously through the fourth quarter and into 2020 after a third-quarter price decline, and executives recently touted their strategies to navigate the volatile market.

The robust global coking coal demand slowed recently, resulting in a price drop for U.S. producers, some of which have idled mines in the interim as they await an uptick in the market. Seaport Global Securities LLC analysts wrote in a recent report that metallurgical coal prices seem to have stabilized in the last few weeks, due largely to increased spot activity from China and India. But they also noted that the recent "dramatic fall" in metallurgical coal prices is likely to take a toll on eastern railroads' earnings in the fourth quarter.

Looking ahead, executives discussed their companies' efficiency, flexibility and prior investments in their operations.

Warrior Met Coal Inc. CEO Walter Scheller said the company ran its operations "especially hard" during the first three quarters of the year to take advantage of peak periods of metallurgical coal pricing. In the fourth quarter, between more days off around the holidays and market conditions, Warrior will focus on routine maintenance and complete a 10-day longwall move to prepare the mines for 2020. Its inventory should dip as a result.

In the fourth quarter, the miner expects spot opportunities to primarily be centered in Asia and that global steel producers will be pressured by thin margins amid low steel prices, the CEO said.

"For these reasons, we remain cautious on the fourth-quarter market conditions, and anticipate that pricing volatility will continue to impact the markets until the current Chinese port restrictions ease and trading activity resumes for 2020 deliveries," Scheller said.

Arch Coal Inc. CEO John Eaves noted in October that Australian metallurgical coal output has only modestly increased. The company is well-positioned to comfortably navigate the soft market to generate "solid margins," he said.

"In short, supply and demand appear only modestly out of balance at present, and corrective measures seem to be underway," Eaves said on an earnings call.

Ramaco Resources Inc. is keeping a "good deal of production optionality on the table," allowing the company to ramp up or reduce production depending on 2020 market demand, said Executive Chairman Randall Atkins on the company's Nov. 6 earnings call. The coal producer expects to produce somewhere between 1.8 million tons, should the market decline, and 2.3 million tons, he said.

Given the recent coal bankruptcies and acknowledging some of its potentially higher-cost or overleveraged peers, Ramaco is "actively looking at some of these situations to see if we can accelerate our growth curve, either from a reserve, logistical or production standpoint in a cost-effective but opportunistic manner," Atkins said.

Following a disappointing third-quarter performance, Contura Energy Inc. executives told S&P Global Market Intelligence that they are focusing on driving down production costs to more easily withstand the volatile market. CEO David Stetson noted on a recent earnings call that the company's capital projects that commenced in 2017 and 2018 validated its dedication to moving from high-cost to low-cost Central Appalachian coking coal mines.

"Much more of our operational and corporate mindset is around a nimbler and flatter organization that we're putting in play," Stetson said in the interview. "As these markets continue to fluctuate, we want to be able to participate in the markets at various levels. For public equities in the coal sector, it's a difficult time, but we believe we can operate in almost any environment."

Gregory Marmon, a Wood Mackenzie senior research analyst, said in November that his group expects metallurgical coal prices to exceed $170/t in January 2020, resulting in an increase in coking coal exports from Alabama.

In a November interview, Benjamin Nelson, senior credit officer and lead coal analyst at Moody's, said some mines will be forced to idle while others can generate positive cash margins at their current pricing.

"Companies whose met mines are at the wrong end of the cost curve may well shut the mines down or at least idle them," Nelson said. "But better-positioned mines I think are still in pretty good shape, and margins will certainly be better than any of the thermal exports."