Arch lowers coal sales target amid rail constraints

US coal producer Arch Resources has slightly lowered its thermal coal sales outlook for 2022, citing rail transportation service challenges.

The company expects to ship 73mn-77mn short tons (66mn-70mn metric tonnes) of steam coal this year. That is down from Arch's April projection of 74mn-78mn st.

"Inadequate rail service has been a persistent issue at all our operations in recent quarters, and I am disappointed to report it has extended itself into the first month of the third quarter," Arch chief executive Paul Lang said. "While we continue to engage with rail carriers on a continuous basis, the reality is there is only so much we can do to rectify the situation."

Because of rail transportation woes, the amount of thermal coal Arch has committed to ship in 2022 dropped to 75.3mn st from 80.4mn st. Arch expects the roughly 5mn st that are no longer committed for this year to ship in 2023.

"While that clearly is not ideal given the time value of money, it does mean our 2023 book already looks exceptionally healthy," Arch chief operating officer John Drexler said.

The midpoint of Arch's 2022 thermal coal sales target still would be a 10mn st increase from 2021 steam coal sales.

Arch's thermal coal sales in the second quarter climbed to 17.8mn st from 15.2mn st a year earlier.

Domestic demand for thermal coal remains strong, as many US utilities are seeking multi-year supply contracts amid concerns over limited supply. The netbacks from exporting its Powder River basin (PRB) and Colorado coal are also "extremely attractive," Drexler noted.

Arch also recently signed a fixed-price agreement to move a vessel of high-volatile type B metallurgical coal as thermal product to Europe in the fourth quarter, Drexler said. The price paid for the vessel is substantially higher than current high-vol B marks, he said. Arch expects more opportunities for similar deals as the year progresses.

Because thermal coal is trading at a premium to coking coal, "a fair amount" of global coking coal supply may cross over into the thermal coal marketplace, Lang said.

"As you can imagine, we are exploring every opportunity to ship uncommitted coking coal volumes into the thermal markets," he said.

But rail constraints are limiting the amount of coal Arch can ship overseas.

Rail service for Arch's eastern US operations improved slightly last quarter when compared with January-March while the western railroads' performance declined, Lang said. He added that Arch remains hopeful service will recover through the rest of 2022.

"The progress remains painfully slow, and the situation is extraordinarily frustrating for all of our customers," Lang said.

He said CSX has done a better job the last two-three months following a "disaster" of a first quarter.

"I'm more hopeful of CSX than any of the other four railroads," he said. "The frustration level with the western railroads is only increasing."

Arch lowered its forecast for its 2022 western US coal exports to 2.5mn st from 3.5mn st projected in April. That includes 1.5mn st from the West Elk mine in Colorado and 1mn st from the Black Thunder mine in Wyoming.

Drexler said Arch recently concluded a multi-year, fixed-price deal to ship coal from the West Elk mine into Europe beginning in 2023. Given the export opportunities, Arch anticipates the mine having "healthy production levels" from a historical perspective for the next several years.

Arch's metallurgical coal shipments increased last quarter to 2.1mn st from 1.8mn st a year earlier.

Arch expects to sell 8.2mn-8.6mn st of coking coal this year. The midpoint of the target is 1mn st less than what Arch projected in April.

By Nick Georgiou