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Arch Is Gloomy Despite The Positives

Reuben Brewer
November 12, 2013

The coal industry is in the midst of a painful market correction. There are positive signs beginning to emerge, but Arch Coal (NYSE: ACI), one of the industry's biggest players, isn't ready to call the upturn. Is management being too conservative?

Some good news
Powder River Basin, or PRB, coal "is competitively positioned versus natural gas," according to Arch Coal's management. Through August, the average price per million BTUs for gas was $3.65. PRB coal can compete with gas priced as low as $2.50 per million BTU. Even better, "the natural gas forward price curve is well above [$3.65]..."

That's a good long-term indication that miners with PRB exposure, like Arch, Cloud Peak Energy (NYSE: CLD), Peabody Energy (NYSE: BTU), and, to a lesser extent, Alpha Natural Resources (NYSE: ANR), have a bright future. And based on supply and demand trends, Arch believes "coal markets could become much more dynamic next year..." And that's true even if demand is flat.

Cloud Peak, however, is the only company noted above that is 100% in the PRB. That gives it an edge and helps explain why the miner hasn't posted a quarter of red ink through the industry downturn. Alpha Natural Resources, which only does 10% of its business in the PRB, is at the opposite side of the spectrum.

In fact, Alpha has notable exposure to Central Appalachia, or CAPP, where Arch Coal notes that mine closures are picking up. That region is suffering because it is higher cost than the PRB and nearby Illinois Basin, or ILB, which is competitive with gas in the $3.50 per million BTU range.

More than thermal warmth
Of the quartet noted above, only Cloud Peak is focused on thermal coal. Peabody Energy, Arch Coal, and Alpha Natural Resources all have notable metallurgical coal operations. On that front, Arch notes, "it's no secret that we are in the midst of a global cyclical downturn..." With its two main markets under stress, it's no wonder that the coal industry is such a pariah.

Unlike domestic thermal coal, however, which is feeling pressure from cheap gas and government regulations, met coal is more an oversupply problem than a demand issue. Here, Alpha expects improvement "...driven by continued rebound in demand and ongoing supply rationalization." Basically, high cost met mines are getting shut because of low prices despite still increasing demand. The company highlights domestic strength, demand from Asia, and an expected strengthening in Europe as positives over the next year.

That's definitely good news for met miners since price in this indu