Alpha Natural Resources (ANR), one of North America's largest coal miners, reported its Q4 2013 results on February 12, posting a lower than expected quarterly loss. While the results were aided by lower costs for the company's eastern coal operations, weaker volumes and low price realizations for metallurgical coal continued to play spoilsport. While the company's quarterly revenues were down by around 30% year-over-year to $1.09 billion, the adjusted net loss narrowed to about $115 million from around $134 million a year ago.  Below is an overview of some of the factors that influenced the company's results for the quarter and what to expect going forward.
Metallurgical Coal Business Remains Challenging, Near-Term Outlook Is Weak
The metallurgical coal market has been facing some significant challenges over the past year, and things didn't get much better through the fourth quarter. Although Alpha's met coal price realizations improved by roughly 2% sequentially to around $96.50 per ton, shipment volumes fell by around 12% to 4.43 million tons. On a year-over-year basis, pricing was down by over 20%. The glut in the global met coal market has stemmed from stronger production in Australia, where miners have brought several new projects online while benefiting from a weak Australian dollar, and also from the slowdown in Europe which resulted in sluggish demand.
Overall, we could see signs of improvement in the global met coal market through 2014, although pricing could still remain depressed. For this year, global steel demand is expected grow at a rate of roughly 3.3%, which is slightly above last year's growth rate. More importantly, Europe, which is ANR's largest export market, is expected to see steel demand grow by roughly 2.1% this year versus a decline in 2013. This could bode well for met coal demand. However, supply is expected to continue to grow as well, albeit at a slower rate , with fewer new mines coming online in Australia. The markets are expected to see an additional supply of about 10 million tons in 2014, while in contrast, during 2013, Australian supply alone grew by about 24 million tons. 
Thermal Coal Volumes Remain Sluggish, But Near-Term Outlook Looks Good
Alpha's Eastern thermal coal operations saw shipment volumes rise by around 1.6% sequentially while pricing declined by around 2.5% to $61.60 per ton. Powder River Basin coal volumes fell by roughly 8% sequentially while prices remained almost flat. The decline in volumes comes despite the fact that thermal coal consumption in the U.S. has actually been increasing on the back of higher natural gas prices. Gas prices have increased from levels of under $3.40 per million British thermal units (MMBtu) in 2012 to levels of over $4 in late 2013, which resulted in more coal consumption for electricity generation. However, overall shipment volumes for coal producers has remained lackluster, as electricity generation companies have been drawing down on their coal stockpiles faster than they have been replenishing them. As of the end of December, overall domestic thermal coal inventory fell by around 20% year-over-year to 150.5 million tons. In terms of days of burn, inventory levels stood at around 64 days which is below the five-year average of 70 days. ((ref:1)) We believe that ANR's thermal coal volumes should pick up in 2014 as utility companies replenish their coal stockpiles as they continue to burn more coal.
In the quarter, the company was able to make some improvements to its costs, with the cost of Eastern coal (which include both met coal and Eastern steam coal) falling by around $6 sequentially to $68.85. The reduction in costs was mainly due to smoother mining at the company's Cumberland longwall mine which had experiencing some unfavorable mining conditions in mid-2013. Besides this, ANR has also been curtailing production of some higher cost thermal coals such as Central Appalachian coal and this should aid overall production cost and margins in the long run.
Disclosure: No positions.