US coking coal producers start output cuts as price slump hits hard

Long-expected mine stoppages have finally come to the US coking coal industry, as tumbling prices for the steelmaking raw material drive the balance sheets of many mines into loss.

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US coal major Walter Energy announced on Tuesday April 15 that it planned to idle two of its Canadian coking coal mines, hit by low prices.

The Wolverine mine will be idled “immediately” and its Brule mine will be idled by July 2014, the miner said. They will remain idle until the company can achieve “reasonable value” from the reserves, Walter explained.

The miner is the second North American coking coal industry casualty in a week.

US producer James River Coal announced on April 7 that it planned to file for Chapter 11 bankruptcy protection, after halting production at four mines and laying off hundreds of workers at the end of last year.

The miner, based in the US state of Virginia, said that it will continue to mine through the restructuring process.

Tumbling prices
Coking coal prices have fallen dramatically in the past six months, to their lowest point in this cycle.

The price drops came in the face of industry oversupply and weak steel demand. Steel First’s premium spot hard coking coal index fob Australia has dropped from more than $145 per tonne fob in November 2013 to just over $110 per tonne fob in April 2014.

US coking coal producers, many of which have higher production costs than their Australian counterparts, have been hit hard by the lower pricing environment.

Hopes that second-quarter 2014 contract settlement prices would withstand the downward pressure of the spot market were defeated when Anglo American reached a settlement of $120 per tonne fob for its German Creek premium hard coking coal brand, down from $172 per tonne achieved in the second quarter of 2013.

“The $120 settlement sent shockwaves through the US coking coal industry,” Doyle Consulting president Ted O’Brien told Steel First.

Take-or-pay troubles
US coal producers have been pushing out tonnages in a bid to produce through the price crisis, tied into costly take-or-pay contracts with rail operators.

Under the terms of a take-or-pay contract, a coal producer must pay for an agreed amount of haulage even if it is unwilling or unable to use it all. Such contracts are common throughout the coal industry, providing finance for vital infrastructure projects in coal-producing nations including the USA and Australia.

“Even rail operators slashing freight costs down to $21-22 per tonne hasn’t helped. All the slack has been taken out of the system and they are still struggling,” O’Brien added.

Australia benefits
Australian mining majors including BHP Billiton, Rio Tinto and Vale have benefited from competitive sea freight rates from Australia to Europe, higher grade products and lower production costs than many of their US counterparts.

As a result, they have managed not only to keep a grip on their traditional Asian markets but increasingly to sell spot and contract tonnages into Europe, where many mills have historically had the bulk of their coking coal requirements provided by Atlantic producers.

“BHP Billiton keeps on producing and kills the competition,” a European coal trader commented.

“Today, customers can buy premium Australian material for the same price as poorer quality US coal – and of course they will take the good stuff,” the trader added.

Downgraded
On April 11, three major publicly listed US coking coal producers – Arch Coal, Alpha Natural Resources and Walter Energy – were downgraded to “sell” by UBS financial analyst Kuni Chen.

Standard Bank analysts said in a research note on April 14 that the price outlook for coking coal remained depressed, adding that Chinese coal conditions remained key to seaborne coking coal prices and that port stock levels remained high.

Elsewhere, prices appear to have bottomed out, with reports from Asian buyers of a slight pick-up in seaborne coking coal prices.

But, traders told Steel First, any benefits arising from this are expected to be felt by Australian rather than US producers.

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