Adds more information, met coal sector consolitation and thermal coal.
US coal producers Arch Resources and Consol Energy have announced plans to merge as they seek to focus on customers in the global markets.
The two companies will combine in an "all-stock merger of equals" to set up Core Natural Resources with 12mn st/yr (10.9mn metric tonnes/yr) of metallurgical coal capacity and 25mn st/yr of high-calorific thermal coal capacity. The combined company also would include Arch's Powder River basin (PRB) mines, which had 62.8mn st of sales last year.
The merger will give the new entity access to two east coast shipping terminals — the Consol Marine Terminal in Baltimore, Maryland, and the Dominion Terminal Associates facility near Norfolk, Virginia — as well as access to US west coast and Gulf of Mexico ports.
Expectations are for the companies to generate $110mn-140mn of cost savings and "operational synergies" within 6-18 months of the close of the transaction. The transaction is subject to stockholders' and regulators' approval and is anticipated to close by the first quarter of 2025, with Arch owning 45pc of the combined company and Consol having the remaining stake.
There are opportunities for appropriately blending products across met coal, thermal coal and crossover or mixed coal grades, the companies said.
Potential synergies
"The merger with Consol is a natural extension of what we've been saying and doing relative to reducing our exposure to domestic thermal coal and growing our seaborne thermal business," said Arch's chief executive Paul Lang.
Arch expects that the merger will allow its West Elk thermal coal mine in Colorado to have a better ability "to compete on the global stage" and that it will remain "a core asset". The producer will transition operations at the mine to an area of the property with higher quality coal that should translate into higher sales volumes on the seaborne market and stronger relative pricing.
In addition to targeting international generation demand, growth in industrial export markets like cement is expected to provide opportunities for high-calorific value thermal coal, Lang said. Consol has been selling more to industrial customers recently, including the Indian cement market when high-sulfur coal had a cost advantage over petroleum coke.
The companies expect to have ample capacity to increase exports, at least for the time being. DTA, which Arch co-owns with Alpha Metallurgical Resources, currently has about 2mn st of capacity that is not being used, Lang said. Arch also can export coal through CSX's Curtis Bay terminal in Baltimore.
Executives did not announce specific plans for Arch's PRB mines: Black Thunder and Coal Creek in Wyoming.
Arch has been taking steps to reduce its exposure to US thermal coal markets. That included an unsuccessful effort in 2019 to merge western US assets with Peabody Energy that was challenged by the US Federal Trade Commission. In 2021, the company said it would accelerate shrinking the footprint of its PRB mines and focus on metallurgical coal.
"We've seen significant declines in the domestic thermal marketplace since we sort of announced that pivot and began […] moving in that direction really, we were thinking primarily of those assets that are more captive to domestic market," said Arch's senior vice president of strategy Deck Slone. Arch noted that PRB mines are "not entirely captive", but the producer can only export limited volume from the region.
In the eastern US, Arch produces a well-regarded high volatile A coal that offer blending opportunities in the met coal space and had in the past been sold into the thermal market as a high calorific coal alternative following the ban on Russian coal imports in 2022 by European countries. Arch also operates the Beckley low volatile coal mine located close to Consol's Itmann mine in West Virginia, which also produces a low volatile coking coal, again offering opportunities for coal blending.
Trend of consolidations
The planned merger is a reflection of growing cost pressures on US met coal producers at a time of falling prices. Closures and Chapter 11 bankruptcies at smaller and higher cost operations such as Ben's Creek have emerged earlier year while mergers and acquisitions have long been suggested as a likely route for others.
Prolonged weakness in the global steel markets has also translated to a challenging price environment for metallurgical coal. The Argus fob Australia premium low-volatile coking coal index, a key reference for global seaborne prices, fell to $204/t today from $307/t on 1 March, amid a slump in demand and oversupply in Asia-Pacific. The Argus high-volatile A assessment stands at $187.50/t fob Hampton Roads today — close to the $170-180/t fob equivalent margin that some US producers are currently citing — and down from $260/t at the start of March.
An anaemic European steel market facing blast furnace closures and reduced steel utilisation rates has been a challenge for US producers, which enjoy a freight advantage over Australian exports. But most US producers have indicated that term contract customers are still continuing to perform on their commitments. Declining blast furnace capacity in Europe in the longer term has also meant that US producers are increasingly looking to steelmakers and merchant coke makers in Asia-Pacific, particularly China, India, Indonesia and Vietnam, for sales opportunities.
"We will gladly ship all our tonnes into the seaborne market but are also happy to sell tonnes into the North America market if it makes sense," said Arch. Arch has in recent years expanded its reach for met coal sales into Indonesia and Vietnam.
