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Analysts see triple-digit prices in domestic met coal's future

Coal industry players are optimistic on the metallurgical coal market outlook, according to analysts with Seaport Global Securities LLC, with a possibility of triple-digit domestic prices next year.

Mark Levin, senior analyst, and Nathan Martin, senior associate analyst, said in an Aug. 15 note that Xcoal Energy & Resources, which markets mostly U.S. coal to Pacific Basin customers, was bracing for a hard second half of 2017 until the outlook changed due to supply disruptions. These include South32 Ltd.'s Appin mine gas issues, strikes in Australia and some longwall issues at the Oak Grove mine in Alabama owned by Virginia Conservation Legacy Fund Inc. subsidiary ERP Compliant Fuels.

"[Xcoal] now thinks the physical market is much tighter than many realize, leading them to the view that met coal prices could remain supported at or above $150 per tonne for some time," the Seaport analysts said. Xcoal also believes that China lacks premium metallurgical coal, as the coal it has been importing from Mongolia is of lower quality.

Seth Schwartz from Energy Ventures Analysis said at Seaport's Aug. 11 coal conference in St. Louis that he believes that domestic steel producers will pay $100 per ton to $115 per ton for high-vol A and about $30 per ton less for high-vol B in 2018.

"[Arch Coal Inc.] also seemed optimistic, noting current index prices imply the likelihood of very strong annual prices. One of the U.S.' largest private met coal producers, [Coronado Coal LLC], and Canadian-listed [Corsa Coal Corp.] wouldn't bless specific numbers or price ranges, but suggested domestic steel producer demand for coking coal was stronger (and earlier) than normal and that prices are likely to be very favorable for producers," Levin and Martin said.

Schwartz said at the conference that domestic utility coal inventories need to drop to 120 million tons before the coal sector recovers some of its pricing power; he estimated that about 160 million tons are on the ground.

"Put another way, he thinks that while inventories are coming down, they are still way too high following another mild winter (one of the three mildest on record), which is why utility coal prices remain in the doldrums," the analysts said.

Other highlights from the conference: While most Powder River Basin producers agree that the region needs consolidation due to excess capacity and an oversupply of players, the analysts had the sense that no major moves are imminent.

"It just doesn't feel like there is enough of a risk appetite," the analysts said, adding that the odds of getting regulatory approval for a merger "are likely no better than 50/50, and the process would likely take years, creating an overhang."

They also said board members of recently reorganized producers likely need to breathe again after "taking on such a gargantuan task" and are more focused now on returning cash to shareholders than on mergers or acquisitions.

"As such, we think M&A would have to be driven by activist shareholders," Levin and Martin said.

The situation is different in the metallurgical coal market; the analysts said both Coronado and Corsa "would love to grow through M&A if they can find attractive assets at reasonable valuations."