Metallurgical coal, the hard, baked rock used largely in steel production, has become increasingly valuable over the last few months. While it’s found primarily on the eastern side of the U.S., the recent rise in interest could have implications out west.
The turnaround is not lost on market analysts. Met coal helped build the storm that crashed many Wyoming coal companies, sending them into bankruptcy and resulting in layoffs across the state.
However, similarities between this boom and the last may be superficial, analysts say. Producers are running tighter budgets post-bust and are more risk-averse. Ultimately, experts do not expect another mad rush to capitalize on metallurgical coal.
The price rise doesn’t directly affect Wyoming, where producers mine a softer, wetter coal used for electricity. But many big companies that operate in the state have a stake in both types of coal.
When met boomed in 2011, companies with operations in Wyoming dove in, hoping to make good on what appeared to be unending demand from China for steel production.
When that demand tumbled in 2014, so did companies like Alpha Natural Resources, Arch Coal and Peabody Energy. Each filed for bankruptcy in the last year laden with debts from investing in met assets.
But there are some distinct differences this time, said James Stevenson, a coal analysts for for IHS Energy.
One difference is that producers remember being burned last time.
“There’s been a risk management revolution in the U.S. where companies are reluctant to deploy capital when they don’t have contracts,” he said. “If they haven’t sold the tons, they don’t necessarily want to spend money to increase that production.”
When U.S. producers capitalized on the met boom years ago, they were actually moving in on a market usually dominated by Australian producers. That year about a third of Queensland, Australia, was flooded, causing long-term effects in the bowl that holds significant amounts of the world’s met coal.
The issue was one of supply, not just Chinese demand, Stevenson said. And though supply has been hampered again this year in Australia, it hasn’t been as catastrophic, nor have U.S. met exports risen to fill the gap.
Show me the money
It is too soon to say whether the rise in met prices will last or if coal companies looking to finance more investment in met would find eager financiers, said Stevenson.
“Money is there. It’s just that the case needs to be made,” he said.
At this point, it doesn’t appear that many are pleading that case, said Monica Bonar, an analyst for Fitch Ratings.
“Prices have at least doubled over a short period of time,” she explained. “But the overall growth environment isn’t terrific.”
Still some are watching companies closely to see if temptation drives them toward met again.
“I’d argue that we could easily see a repeat of what happened last time – of producers making boom-time investments that quickly come back to haunt them,” said Clark Williams-Derry an analyst at the Sightline Institute, a Seattle-based nonprofit that supports a transition to renewable fuels.
The trouble is that financiers are less likely to support investing in the boom, cautious of a repeat, he said.
Investment in coal is generally low, but few companies appear to be planning considerable growth in the met market, said Bonar, the Fitch analyst.
What’s more likely to happen is that players outside the U.S. will meet what demand exists now, Bonar said.
“I think you will have a big supply response out of Australia, where a lot of those guys really can and have in the past, beefed up production pretty quickly,” she said.
From bust to boon
For now, it’s the companies that already have metallurgical coal operations that will benefit — some of the same companies that went down in the last bust, Bonar said.
Contura Energy, which rose out of the bankruptcy of Alpha Natural Resources, projected enthusiasm for the met rise in its third-quarter financial statements. In addition to the Belle Ayr and Eagle Butte mines in Campbell County, Contura acquired a number of Appalachian mines from the bankrupt Alpha.
“We believe Contura is well-positioned to take advantage of tremendous opportunities in the current market environment, especially in metallurgical coal,” said Contura CEO Kevin Crutchfield in a statement last month.
The company reported that global steel demand is expected to grow, with the World Steel Association projecting a 0.5 percent increase in 2017 following a 0.2 percent increase this year.
The rise may be good news for companies like Contura and Arch, who have Appalachian operations and are either new or emerging from bankruptcy in need of extra cash flow. However, the news probably isn’t good enough that U.S. companies will once again risk it all on the met muse.