The U.S. coal industry has been going through hard times recently, as coal demand and prices have remained weak. In this article, I will be discussing the upcoming met coal benchmark price settlement for 4Q2013. I will also briefly go over the U.S. coal companies whose earnings are highly sensitive to met coal. Met coal benchmark price for 4Q2013 is expected to settle in the next few weeks. I think the met coal benchmark price for the upcoming fourth quarter will settle higher than the benchmark price of $145 per metric ton for 3Q2013, which was the lowest benchmark price since 2009.
Due to positive economic indicators and the recent improvement in the met coal spot price, I believe that the met coal benchmark price will get better for the upcoming fourth quarter. Met coal spot prices have increased almost 16% quarter-to-date to $150.5 per metric ton. Given that recent Chinese economic data has shown signs of improvement and stabilization, we might see a continuous positive trend for met coal prices in the future. However, the magnitude of the price recovery will remain dependent on the extent of production cuts made by producers, which will address the problem of excess supply in the market.
Among other factors that bode well for met coal markets, one is that the eurozone seems to be recovering from the ongoing economic crisis, and demand for met coal has been on the rise, as Australian exports have shown solid strength in the recent past. In 1H2013, Australian met coal exports were up by 6 million metric tons. It is expected that Australian met coal exports will increase by 6% in 2013, which reflects that demand for met coal is strengthening. Also, U.S. coal production has decreased 3% YTD, resulting in improved supply management and stabilization of coal markets.
According to an analyst, Lukasz Prokopiuk, cited by Bloomberg, "The prospects for coking coal are very good. The global economy has likely bottomed out, which boosts forecasts for the steel market."
U.S. coal companies with significant exposure to met coal operations include Walter Energy (WLT), Alpha Natural Resources (ANR) and Arch Coal (ACI). These companies will benefit as met coal markets improve. ANR and ACI are among the leading U.S. met coal companies, who have announced to curtail their production in response to weak market conditions. ANR has announced to lower its annual met coal production by $1 million metric tons, whereas ACI has reduced its annual met coal production by 2 million metric tons. Despite the recent production cuts in the U.S., for continued and sustainable improvement in prices, I believe additional production cuts are required.
Given that the signs for met coal markets have improved recently, the above mentioned three stocks have outperformed the broad market since August, last month. The table below shows the price performance comparison between WLT, ANR, ACI and the S&P 500 since August 1, 2013.
Price performance since 1 Aug. 2013
Due to the factors mentioned above, I believe the met coal benchmark price for the upcoming fourth quarter will settle to the north of 3Q2013's benchmark price of $145/ton. Also, I think coal stocks have bottomed out and remain an attractive investment option for investors. However, better coal supply management is required for continuous and sustainable recovery in the market. As more coal production cuts will flow through markets, and global economic activity strengthens, coal prices will continue to move up as we move forward.