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Exports lifted US coal earnings in Q4'17 but could be threatened by new tariffs

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Exports lifted US coal earnings in Q4'17 but could be threatened by new tariffs

The strong international demand for metallurgical coal has boosted the earnings of several U.S. coal companies during the most recent quarter, but new steel and aluminum tariffs might adversely affect this recent development.

The sector saw a vast improvement in the market for coal through much of the year, particularly exports and metallurgical coal used for steelmaking. The year also saw some of the largest players shift their focus from volume growth to returning profits to their shareholders.

"The strong export market has been critical in supporting the domestic market ... absorbing excess tonnage and often creating a price floor for domestic producers," B. Riley FBR Inc. analyst Lucas Pipes said in a recent note.

Coal companies that have recently laid out plans to expand their presence in the international coal market include Peabody Energy Corp., Arch Coal Inc., Alliance Resource Partners LP, Cloud Peak Energy Inc., Foresight Energy LP and CONSOL Coal Resources LP.

Peabody, Arch, Alliance, Cloud Peak and Murray Energy Corp. were the largest producers of coal in 2017.

However, the upswing in export opportunities could be jeopardized by President Donald Trump's new order to impose a 25% tariff on steel imports and a 10% tariff on aluminum imports.

"I worry about countermeasures; I worry about if the Europeans are having a difficult time exporting steel, then their demand for U.S. coal could actually decline," said Andy Blumenfeld, head of market analytics for Doyle Trading Consultants and a former Arch executive. "This, of course, could have probably a bigger impact on U.S. metallurgical coal than any pickup on the domestic side."

On the thermal coal side of the industry, a new bill was introduced in the U.S. House of Representatives that would provide a temporary tax credit for existing coal-fired power plants, with the goal of slowing a rising tide of retirements.

U.S. Rep. Larry Bucshon, R-Ind., introduced House Bill 5270, or the Electricity Reliability and Fuel Security Act, on March 14. The bill would provide a tax credit equal to $13/kW of a qualifying coal plant's output or 30% of the plant's operation and maintenance expenses, whichever is lower. Units that qualify for the credit must use coal to produce at least 75% of their electricity.

The latest batch of coal companies reporting financial results for the quarter were Corsa Coal Corp., Hallador Energy Co. and Rhino Resource Partners LP.

Corsa on March 13 reported net and comprehensive income of $62.2 million in the fourth quarter, or 56 cents per share, compared with a loss of $10.7 million, or 13 cents per share, in the fourth quarter of 2016.

The company sold 811,905 tons of metallurgical coal it produced in 2017, according to its earnings report. Corsa is aiming to double its metallurgical coal production from 2017 to 2019, CEO George Dethlefsen said on the company's March 14 earnings call.

Hallador also posted gains for the quarter, reporting net income of $21.4 million, or 69 cents per basic and diluted share — a jump from the net loss of $3.8 million in the last quarter of 2016, according to results released March 12.

Rhino reported a net loss of $18.7 million, or $1.45 per unit, in the fourth quarter, compared with a loss of $3.8 million, or 41 cents per unit, in the prior-year period. Despite this, the partnership's sales volume increased by 18% year over year. It has also contracted sales in place for 2018 that will exceed the levels it reached in 2017, according to Rick Boone, president and CEO of Rhino's general partner.

Upcoming events:

Pennsylvania Department of Environmental Protection: The department will hold an informal public conference on P&N Coal Company's mine permit application on March 21 in Westover, Pa.

Burton K. Wheeler Center: The center will hold a "Future of Coal" conference on April 6 at the Northern Hotel in Billings, Mont.

Coal Prep Society of America: The society will host its CoalProTec2018 conference April 23-25 at the Lexington Convention Center in Lexington, Ky.