Things were already looking tight in the coking coal world before Arch Coal (NYSE:ACI) decided to pay $3.4 billion for International Coal Group (NYSE:ICO). The deal pays International Coal shareholders a 32% premium over Friday's close and will create the second-biggest U.S. supplier of metallurgical coal. As the buyer, Arch is taking a bit of a short-term beating in the market this morning, but take a look at the long-term prospects here.
Metallurgical or "coking" coal burns cleaner than grades of coal normally assigned to create heat and run power plant turbines. This makes it invaluable for the fabrication of steel. However, it is also fairly rare at this point, which has driven prices up this year and motivated deals like this.
This merger will be a boost to the entire sector and lift valuations that could already have been rationalized at their previous levels. Remember, the coking coal space is the key to steel, along with iron ore -- in which VALE is the name to watch. Higher coal prices ahead are unlikely to be beneficial to members of the steel group, to put it mildly. Other players in the coking coal world: Massey Energy (NYSE:MEE) and, in Russia, integrated steel maker and coal miner Mechel (NYSE:MTL).