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Warrior: New met coal pricing allows volatility, upside for flexible producers

Warrior Met Coal Inc. CEO Walter Scheller is expecting more volatility in metallurgical coal markets and is poised to take advantage of a shift to an index-based pricing formula.

Scheller said a new index-based pricing formula replacing the former benchmark pricing tradition for metallurgical coal deals will "expose market participants to great volatility." On an Aug. 3 earnings call, he said that could allow Warrior more upside in the right market conditions.

He said the new index-based pricing mechanism allows for greater transparency and easier settlements while solving deficiencies apparent before a recent negotiation standstill brought on by the supply disruption wrought by Cyclone Debbie. Scheller said in the past, settlement discussions have become delayed when buyers and sellers struggle to arrive at a consensus after last-minute swings in pricing.

He said the new industry pricing formula will come from the average of pricing indices from S&P Global Platts and The Steel Index on a one-month lag basis.

Scheller said the company is well-built to take advantage of more volatile pricing. Warrior was formed from the assets of Walter Energy Inc., which recently completed a bankruptcy reorganization.

"We have a flexible mine plan, a variable cost structure in areas like labor, royalties and logistics and a clean balance sheet," he said. "All of these allow us to provide an agile operational response to price swings in the hard coking coal price — in this case, ramping up quickly and successfully to capture meaningful upside in the current market. At the same time, our exceptionally low cost structure combined with a high premium quality product results in our having some of the highest price realizations and operating margins of all U.S. met coal producers."

On the call, Scheller noted met coal prices spiked to over $300/tonne in April and downward to a low of $139/tonne on June 15. Prices have since risen to more than $170 per ton in July based on supply and demand factors coming out of China and Australia.

Peabody Energy Corp. recently said it had agreed to an index pricing formula advanced by Nippon Steel & Sumitomo Metal Corp. The industry and analysts have been relatively upbeat on the change to met coal pricing so far based on its transparency and flexibility.

S&P Global Platts is owned by S&P Global Inc.