Sluggish thermal coal market weighs on Arch

WEAKNESS in US thermal coal markets continued to impact Arch Coal’s results in the second quarter of 2012, leading to a loss of $US434 million ($A412 million) for the six months to June 2012 compared to the $62.5 million net income figure for the previous corresponding period.
Sluggish thermal coal market weighs on Arch Sluggish thermal coal market weighs on Arch Sluggish thermal coal market weighs on Arch Sluggish thermal coal market weighs on Arch Sluggish thermal coal market weighs on Arch

At the Coal Creek mine, courtesy Arch Coal

Staff Reporter

While half yearly revenues for 2012 came in at $2.1 billion – higher than $1.8 billion reported in 2011 – Arch’s customers continued to build power generator stockpiles during the second quarter.

US coal consumption for power generation declined 75 million tons through the first half of 2012, and could decline by more than 100Mt for the full year, the company said.

“Contributing to domestic thermal market weakness during the first half of 2012 was increased substitution of gas for coal at power generators, driven by decade-low natural gas prices, and unseasonably warm weather in the winter of 2012,” it said.

“We expect that thermal coal exports will somewhat offset the weakness in domestic markets. We have increased export volumes over 2011 levels in the first half of 2012, exporting 7 million tons. China and India remain on pace to surpass record coal import levels set in 2011, although we believe a softening of the pace will occur in the second half of 2012.”

Metallurgical coal demand has been affected by weakening in the global and US steel mill capacity utilization, due to slowing economic growth, particularly from the uncertainty in Europe resulting from the sovereign debt crisis, which is affecting consumer demand and reducing steel production and raw material consumption.

Coal sales increased in the second quarter of 2012 from the second quarter of 2011, due to an increase in the overall average price per ton sold. Higher pricing was partially the result of an increase in export shipments, some of which are priced on a delivered basis, increasing the sales price, but also increasing Arch’s transportation costs.

In addition, an increase in higher-priced metallurgical coal sales volumes from the contribution of the International Coal Group operations which it acquired in June 2011, as well as the impact of changes in regional mix improved its average coal sales realizations.

“These factors were offset by the impact of lower thermal coal demand in all operating segments,” Arch said.

In response to these market conditions, Arch has curtailed its production expectations for 2012 and has taken steps to increase operational efficiency and productivity.

In total, it expects to reduce annual volumes by approximately 25Mt in 2012 compared to originally planned levels.

In the Powder River Basin, Arch has idled three draglines, with one being redeployed into reclamation efforts, limited railcar loadings from the West loadout at the Black Thunder mine, and reduced labor costs through scheduling changes and attrition.

In Appalachia, Arch closed five higher-cost thermal operations and further curtailed production at other thermal mines.

The fair value of the closed or idled operations' property, plant and equipment of approximately $51 million was based on the analysis of the marketability of thermal coal properties in the current market environment and our ability to redeploy equipment to other facilities.

“We are also taking steps to control costs by eliminating discretionary spending, reducing headcount and consolidating operations,” Arch said.

“We are controlling capital spending at thermal coal mines and controlling maintenance capital, but we are proceeding with metallurgical coal development projects, namely the Leer mine in Appalachia, and supporting efforts to expand our coal exporting network.”

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