Several US met coal mines boost output in 2Q

Several key US coking coal mines increased production in the second quarter, despite shaky demand fundamentals both domestically and overseas.

Arch Coal's Leer mine in West Virginia produced 1.1mn short tonnes of coking coal in April-June, up by 27.7pc from the first quarter, according to data from the US Mine Safety and Health Administration (MSHA). The company's Beckley Pocahontas mine lifted production by 6.8pc over the period to 283,744st.

Mountain Laurel's output edged down very slightly on a quarter-on-quarter basis to 404,514st, but was up by 17pc from April-June 2018.

Elsewhere, production gains were seen at Corondo's Buchanan mine, to 1.35mn st from 1.24mn st in the previous quarter, according to the MSHA. And Peabody lifted output at Shoal Creek to 711,366st from 536,990st.

Among the mines that have so far reported second-quarter production to the MSHA, the most significant drop was at Oak Grove — formerly owned by Mission Coal and now being bought by Murray Energy in conjunction with fellow producers Contura Energy and Bluestone Resources. Oak Grove produced 224,780st in the second quarter, down from 422,074st in the first quarter.

Financial red flags

The past few weeks have seen three coking coal producers raising financial red flags — first with Cambrian Coal and Blackjewel filing for bankruptcy, and then this week with Blackhawk Mining's announcement that it is filing voluntary petitions for reorganisation under chapter 11 of the bankruptcy code in order to facilitate a restructuring of its debt.

There have been concerns for some time about the high debts and financial footing of certain US producers. Blackhawk is understood to have been planning to restructure its debt, and is advising customers that it does not expect any impact on its operations while the process takes place.

But one US market participant offered a starker outlook, saying that "if prices slump to where some people expect them to end up, then others will follow".

Sources have pegged $150/t fob Hampton Roads as a threshold below which some producers might start to run into difficulties. So far, overall US coking coal prices are averaging above this, although exposure will vary depending on each miner's product mix. Argus yesterday assessed high-volatile type B coking coal at $146.50/t fob, but low-volatile and high-volatile type A comfortably higher at $166.70/t and $178.50/t fob Hampton Roads, respectively.

Another consideration is the involvement some US coking coal producers also have in the thermal coal market, exposing them to particularly weak price conditions and investor reluctance. The API 2 cif ARA index for 6,000 kcal/kg thermal coal index is at $58.33/t, down from $101.15/t cif a year ago.

Arch's recently announced joint venture with Peabody combining their thermal coal assets in the Power River basin and Colorado is in part an attempt to reduce Arch's exposure to the thermal coal market and its considerable challenges. The JV will both strengthen those thermal coal projects and allow Arch itself to focus increasingly on the coking coal market.

Thermal coal comprises around 92pc of Arch's sales with 80mn-85mn st targeted for 2019, versus a coking coal sales target of 6.6mn-7mn st. But thermal coal has lately been contributing a minority share of the company's earnings. In the first quarter of 2019, Arch's average sales price for thermal coal was just $34.66/st, as compared with $133.22/st for coking coal.

Several market participants have for some time been saying that the US coking coal market would benefit from some consolidation, suggesting that there might be appetite for further tie-ups down the road — either purely within the coking coal space or also unlocking some thermal coal synergies.