Whither The Coal Industry

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Alpha Natural Resources (NYSE: ANR) announced a new strategic plan to cope with the abysmal fundamental conditions present in the coal market. The new strategy involves focusing on improving the company’s position in the metallurgical coal market and establishing low cost thermal coal assets in the United States.

Coal Market

Demand for coal in the United States has fallen sharply with May 2012 coal consumption reported at 68.5 million tons, down 13% from May 2011 and 17% below the five year average. Coal operators have tried to deal with the situation in various ways, including a reduction in production. The industry reported 2012 year to date coal production of 672 million tons, down nearly 42 million tons from the same period in 2011. Coal inventories still remain high, although at an improved level relative to earlier in the 2012. There is current inventory equal to 83 days of forward demand cover, down from the peak level of 119 days reported in April 2012.

Thermal Coal

Alpha Natural Resources is a major player in the thermal coal market with 2.5 billion tons of thermal coal reserves in the Eastern United States as of the end of 2011. The company generated 46% of its revenues in the first half of 2012 from sales of thermal coal. Alpha Natural Resources plans to rationalize its thermal coal operations and focus on mines with a cost or transportation advantage or stable customer demand. The company will reduce production by an annualized amount of 16 million tons through mine and equipment idling and other actions. Alpha Natural Resources will cut 1,200 jobs by early 2013 and has already closed eight high cost mines. The mines are located in Virginia, West Virginia and Pennsylvania.

Metallurgical Coal

Alpha Natural Resources also hopes to grow the company through a focus on the international metallurgical coal market, with future growth opportunities in Asia and South America. Alpha Natural Resources will benefit from this growth due to untapped export capacity the company controls in the United States, along with 1.5 billion tons of metallurgical coal reserves.

Cost Structure

Alpha Natural Resources will reduce overhead costs through streamlining its corporate structure and estimates annual cost savings of $150 million through consolidation of operating divisions and other actions.

Industry

Other coal companies have also announced reductions in capital spending and mine closures. Peabody Energy (NYSE: BTU) recently closed a mine in Indiana citing “soft market conditions that make operations uneconomic.” The company also reduced its capital spending range for 2012 and expects to spend between $1 billion and $1.1 billion during the year, compared to the previous range of $1.1 billion to $1.3 billion.

CONSOL Energy (NYSE: CNX) is also reducing production and in early September 2012 announced a temporary closure of the Buchanan mine in Virginia. The company is also reviewing operations at the Amonate Mining Complex in West Virginia and expects to idle part of this mining complex. Both these mines produce metallurgical grade coal used to make steel.

Arch Coal (NYSE: ACI) closed several mines and reduced production at others in the Appalachian region in June 2012 as the company manages what it calls “the unprecedented downturn in demand for coal-based electricity.” The company estimates that the actions will reduce its workforce by 750 employees and result in a one-time non-cash charge of $425 million. The mines are located in Kentucky, Virginia and West Virginia and produce thermal coal.

Other companies are acquiring coal assets despite current conditions. Natural Resource Partners L.P. (NYSE: NRP) recently closed on the final acquisition of a package of coal assets in the United States. The company spent $40 million on properties at the Deer Run mine in Illinois, picking up 200 million tons of reserves. Natural Resource Partners L.P. purchased these assets because of the mines low cost structure and favorable transportation with access to nearby railroads and river access.

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KOL data by YCharts

The coal industry is experiencing difficult conditions, leading investors to dump stocks in this sector and driving prices down 50% or more from highs reached in early 2011. (See ETF’s above). This deep cyclicality sets up an opportunity for investors to find those stocks that will survive and thrive during the next up cycle.


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