U.S. Coal Producers Look Forward to a Better 2010

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Researched by Industrial Info Resources (Sugar Land, Texas)--Coal producers Arch Coal Incorporated (NYSE:ACI) (St. Louis, Missouri) and International Coal Group (NYSE:ICO) (ICG) (Scott Depot, West Virginia) recently reported earnings and financial activity for the 2009 fiscal year. ICG operates mines in northern and central Appalachia, while Arch operates in Central Appalachia, the Western Bituminous Region and the Powder River Basin. Both companies primarily supply coal to the power and metals industries. Earnings for ICG were up significantly for 2009, while those of Arch fell sharply. Both companies experienced declines in sales volumes, but expressed the idea that 2010 would bring positive changes to the coal industry.

ICG's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $201.7 million, up 59% from 2008 EBITDA of $127.2 million. Adjusted EBITDA for Arch was down 39%, dropping from $753.2 million in fiscal year 2008 to $458.7 million in FY09. While no definitive reason exists regarding the difference in the companies' performances, ICG's lower-volume business and substantial reductions in the cost of coal sales seems to have helped the company in terms of earnings.

Both ICG and Arch experienced declines in sales volumes. For the year, Arch sold 125 million tons, compared to 137.8 million tons in 2008, a decline of 9%. ICG sold 16.8 million tons in 2009, a drop of 11% from the previous year.

The CEOs of both companies discussed the trials of 2009, but expressed optimism about the new year. Arch Coal CEO Steve Leer said: "2009 was very challenging for the coal markets. U.S. power demand fell by a record 4% last year, and coal consumption demand declined precipitously. Anemic industrial activity, unseasonably cool summer weather and low natural gas prices all played a role in dampening coal demand, causing customer coal stockpiles to grow to historically high levels. Despite the continuing weakness, we were encouraged to see the first signs of stabilization in the fourth quarter, and the first weeks of 2010 have bought further evidence that the market is beginning to move off the bottom.

"On the demand side, met coal markets continued to strengthen in the fourth quarter, thanks to an increase in global steel production. Worldwide steel output in the fourth quarter grew more than 20% versus a year-ago quarter and grew modestly versus the third quarter 2009. Domestic steel utilization also rebounded from the sharp drop-off of a year ago, now standing above 65% utilization rate through late January."

In a September 2009 presentation, Leer suggested that about 25 million tons of coal had been displaced by the use of natural gas. For additional information, see September 11, 2010, article - Lower Demand Brings a "Rebalancing" to the Coal Market.

ICG CEO Ben Hatfield discussed the recent increased strength in the coal markets. "Coal markets began improving in late 2009, and we continue to see positive signs for a recovery in thermal coal prices during 2010," said Hatfield. "For example, rising natural gas prices, which have climbed above the critical $5 [per million Btu] benchmark should encourage utilities to increase coal utilization. Drawdown of utility stockpiles during December and early January were accelerated by unusually cold winter weather throughout most of the country. Continued economic recovery is expected to increase industrial demand for electricity. And demand for high-volatile metallurgical has increased substantially and is expected to reduce the coal supply available for eastern thermal markets."

Both companies continue capital investments, with ICG estimating 2010 capex to be between $85 million and $95 million, while Arch estimates between $200 million and $220 million of capex. Arch plans to begin construction of an estimated $80 million underground bituminous coal mine near Pinckneyville, Illinois, in 2011 and will begin the requests for quotations (RFQ) process later this year. ICG is currently in the process of expanding its Viper underground mine in central Illinois. The project, which involves expanding the mine from 2.1 million tons per year to 2.9 million tons per year is proceeding according to schedule and is scheduled to be complete in late 2011. Information on these and other projects is available in Industrial Info's North American Metals & Minerals Database.

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