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High met coal prices likely unsustainable but sector gets modest lift

The outlook for metallurgical coal producers was boosted on news the metallurgical coal benchmark price continued to increase.

The $285/tonne benchmark could be the top of a market rebounding from a protracted price decline that contributed to the bankruptcy of top producers in the U.S. coal market. In a recent interview with S&P Global Market Intelligence, Doyle Trading Consultants CEO Hans Daniels said the peak has probably been reached. The new price led FBR & Co. to update its expectations of top metallurgical coal producers Dec. 13.

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"We had previously anticipated a steeper drop from recently elevated spot pricing, and we believe the comparatively brief period of negotiations may have supported a higher settlement, especially compared to the protracted negotiations over the [fourth quarter] settlement price," FBR analyst Lucas Pipes wrote.

FBR now estimates the full-year average of quarterly benchmarks at $210/tonne, compared to the previous estimate of $180/tonne. FBR expects the second-quarter benchmark will fall to $230/tonne and drop off to $130/tonne by 2018.

Pipes boosted his price target for Arch Coal Inc., a noted favorite of Pipes for investing in U.S. coal, from $94 to $95. Pipes also updated Canadian met coal miner Teck Resources Ltd.'s price target to C$33 from C$32.

Moody's Investors Service currently maintains a "stable" outlook on the coal industry as metallurgical coal producers benefit from a recent price rally. However, Moody's adds that the U.S. thermal coal industry continues to face the prospects of a long-term decline due to fuel substitution and regulatory-driven coal plant retirements.

Moody's expects the 2017 benchmark settlement will go much lower than Pipes anticipates. Moody's VP-Senior Analyst Anna Zubets-Anderson said the recent rally is attributable to temporary supply disruptions, weather factors and a stimulus demand increase from the Chinese steel sector.

"Over the next eighteen months, we expect benchmark settlements to come down to a range of $90 to $120," Zubets-Andersen said.

In a Dec. 12 note, Pipes noted that while the new settlement price is "not sustainable," he believes prices could remain higher as long as Australian capacity remains largely fully utilized, U.S. mines remain undercapitalized, producers stay cautious on growth projects and Chinese production goes to a lower level.