US Arch Coal starts development of new HVA mine

US producer Arch Coal has begun development of its new Leer South mine in West Virginia, planning to produce around 3mn st/yr of high-volatile type A (HVA) coking coal, largely for export.

The Leer South longwall mine will be similar to Arch's existing Leer mine and will operate in the same 200mn st/yr reserve base. It is scheduled to start up in late-2021, with a required investment of $360-390mn over the next three years.

"We believe there is significant, unfulfilled global demand for HVA coking coal generally, and our Leer brand specifically," chief executive John Eaves said today, adding that the company is already in discussions with steelmakers globally that are keen to secure additional volumes of Leer-brand products.

Arch estimates that global supply of HVA or equivalent coals totals less than 25mn t/yr, and this sector of the coking coal market has a particularly tight supply outlook. The Argus weekly fob Hampton Roads price for HVA was last assessed at $198/t on 12 February.

Overall, the company expects the global coking coal market to remain under-supplied following many years of underinvestment and with few large-scale projects — particularly for high-quality coking coal reserves — planned for the coming years.

Arch expects an average seaborne coking coal demand growth rate of 1.5pc/yr, alongside an annual depletion rate of 2pc/yr at existing mines. This means the seaborne coking coal markets will require the installation of 10mn t/yr of new mine capacity or a total of more than 75mn t between now and 2025, Arch estimates.

Coal grade balance to shift

Arch expects to produce 6.6mn-7.0mn st of coking coal in 2019, of which almost 60pc will be HVA and the remainder a mix of high-volatile type B (HVB) and low-volatile. It will maintain a similar level and balance of production until 2021. But in 2022, the company expects to be producing at a rate of almost 9mn st/yr, of which 75pc will be HVA.

The shift in balance towards more HVA production will in part be achieved by the launch of Leer South, but also by transitioning its Mountain Laurel operation from longwall to room-and-pillar mining in early-2020, with the intention of moving the Mountain Laurel longwall equipment to Leer South at the same time.

After the Mountain Laurel operation's transition to room-and-pillar mining, the site is expected to produce around 1.3mn st/yr of HVB, roughly 20pc lower than its 2018 output.

"We see great value in expanding further our high-margin HVA production maintaining a value-creating position in HVB markets via a reconfigured Mountain Laurel operation," Eaves said.

The Argus weekly fob Hampton Roads assessment for HVA has lately been around $30/t above the HVB index, albeit some counterparties are trading these coals at slightly different spreads taking into account quality variations between brands.