Product Design & Development

Coal earnings to gauge strength of steel recovery

By TIM HUBER - AP Business Writer - Associated Press
Monday, October 26, 2009

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Coal earnings to gauge strength of steel recovery

CHARLESTON, W.Va. (AP) — Earnings reports from a string of U.S. coal producers starting this week should provide another gauge on the strength of the rebounding manufacturing economy.

While Massey Energy Co., International Coal Group and others are expected to report overall lackluster third-quarter numbers, the spotlight will be on metallurgical coal production from their eastern U.S. operations. Metallurgical coal is used to make coke, a key ingredient in steel manufacturing.

Recent developments such as U.S. coal companies upping metallurgical coal production suggest that demand for steel — and thus coal — is strengthening. That's certainly true for Australia and other coal producers near China and India.

But it remains to be seen whether that benefit has spread to U.S. metallurgical coal producers.

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Wall Street seems to be anticipating as much. Though metallurgical coal is produced in smaller quantities than steam coal for utilities, it sells for more than double the price, often boosting profits.

"Strong September steel production figures from the country may indicate a continuation of robust metallurgical coal import demand," securities firm Dahlman Rose & Co. wrote in an industry report Monday.

St. Louis-based Peabody Energy and Tampa, Fla.-based Walter Energy reported stronger than expected third-quarter profits last week, in large part due to metallurgical coal demand. And while Canonsburg, Pa.-based Consol Energy reported a lower-than-expected profit, it upped metallurgical coal output unexpectedly from a mine in Virginia to meet domestic and international demand.

Whether that holds true for the others will be known starting Tuesday when St. Louis-based Patriot Coal and Richmond, Va.-based Massey are scheduled to report. They're followed by Scott Depot-based ICG, Cleveland-based Cliffs Natural Resources and St. Louis-based Arch Coal this week and Abingdon, Va.-based Alpha Natural Resources Nov. 3. All produce notable amounts of metallurgical coal.

Moreover, some have a growing interest in exporting to Asia. Massey, for instance, said it expects 41 percent of its non-Canadian exports to go to Asia in 2009, up from 33 percent in 2008.

But steel industry analyst Charles Bradford of Affiliated Research Group doubts whether U.S. producers will get much benefit from increasing Chinese steel production. Little U.S. coal gets to China, which typically imports from Australia, though strong Chinese demand can open markets such as Europe.

Bradford expects China to reopen mines it closed for safety reasons, thus cutting back on imports and cutting demand.

"Not very good quality," Bradford said of Chinese metallurgical coal, "but it makes a satisfactory coke."

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