Missed Steel Rally? Massey is Purest Play on Metallurgical Coal

I've totally missed the run in steel stocks, other than my quick in and out foray into US Steel (X) - I sold about 40% ago... oops. With huge increases in pricing in its 2 main inputs, coking coal and iron ore - I am amazed that these companies have been able to pass their prices along and not see their margins contract. But I have been playing them in a secondary way by buying stocks which produce their inputs.

Arcelor Mittal (MT) is the de facto global giant in steel right now - a case study for how emerging market multinationals are becoming powerhouses. I missed this piece last week, but it would help explain in part why Massey Energy (MEE) has been flying of late - the CEO of MT believes metallurgical coal will see price rises of 150-200%. I don't know if I can comprehend that, as it is seems very aggressive, but he is a lot closer to the business than I am... and anything that fits into my "World of Shortages" thesis works for me [Alert: Commodities are Dead]... but hey remember... Barron's says "commodities are done"...

Again, at some point the growth in China must slow (and these commodity stocks will be thrown to the trash temporarily), but even at 4-6% GDP growth; in a country of 1.2 Billion... it's still going to create massive dislocation for hard commodities. And then there's India...

I still contend we are in the early innings of a very long secular story here - which will have many short term ups and downs more due to traders emotions than anything fundamental.

• The price of coking coal, a key ingredient in steelmaking, is expected to rise by 150 percent to 200 percent, driving up steel prices further, the head of the world's largest steel manufacturer, ArcelorMittal (MT), said on Wednesday.
• President and Chief Executive Officer Lakshmi Mittal also said the company sees global steel demand growing by 3 percent to 5 percent over the next decade, although demand in China will likely slow, with the slack taken up by India and other developing economies.
• ArcelorMittal, which makes 9 percent of the world's steel, is well on its way to producing 150 million tonnes of steel per year by 2012 and expects to be 75 percent to 85 percent self-sufficient in raw materials by 2014-15, Mittal said.
• His son, Aditya Mittal, the chief financial officer, told Wall Street analysts that demand from China's developing industrial infrastructure and other emerging economies had led to an average 7 percent growth in the steel market in the last seven years.
• But steelmakers have been hit by big increases in the cost of raw materials such as scrap metal, which is soaring, and iron ore, which rose by 65 percent last month.
• Coking, or metallurgical coal, another vital raw material, is also expected to rise in price. "High (steel) prices are mainly driven by the costs -- energy pricing and the coal price, which is still to be decided in negotiations between the coal producers and the major customers," Lakshmi Mittal told Reuters during a break in the company's investor day.
• "Negotiations are ongoing and the new benchmark price will be announced in a few weeks and then we will be able to pass it on to customers," he said.
• Asked what size of increase in coal prices he was expecting, Mittal said 150 percent to 200 percent. He said the Europe-based company had recently raised its steel prices by as much as $150 per tonne as a result of higher iron ore prices.
• During his presentation, Lakshmi Mittal said Chinese steel consumption was still strong. There were signs its growth rate was slowing, though he still anticipated it growing by 6 percent to 10 percent per year until 2012.
• Also, he said, China's steelmaking industry was no longer a low-cost alternative, as costs there were also rising. (Maybe we can use cheap 3rd world American labor now?)
• ArcelorMittal's strategy, he said, was to keep down costs by producing 110 million tonnes per year of its own iron ore by 2012. The company recently acquired three coking coal mines in Russia and had been allocated blocks of steam coal in India.

There is definitely a potential for the stocks with metallurgical coal to pop when the negotiations for pricing are complete - while I've been very bullish on coal, I did not anticipate this level of price increases. Massey Energy is the purest play on metallurgical coal...

Long Massey Energy in fund; no personal position

Comments

[CSW]

Met coal prices have been reset at the high end of the expected range: over $300 per ton. MEE has the highest percentage of metalurgical coal in its production of any of the US majors that I am aware of. But it is only 25%, which does not make it a "pure play". Further, MEE has numerous contracts in place to provide coal at the old prices. I agree that MEE will benefit from the increase in met coal prices. But that benefit will seep gradually onto the income statement over the next three years; there will not be a significant, immediate step up as would be the case if all its production were met coal and if it sold strictly at spot prices.

[TraderMark]

Hi CSW,

I agree with your points. Actually ANR is the largest met producer - which I added today. These are going to be 2009 plays in terms of enjoying the lions share of the higher prices, as much of 08 is already contracted in. But I think we are going to get quite explosive 09 earning revisions; when the analysts start to catch up to the story and get the investor class in a tizzy with their new and improved numbers is an open question but I'd rather be in, before it happens. In the very very near term these stocks are extended and I'd like to see them pull back before meaningfully expanding positions.

[gothzilla]

There are 3 pure-play met coal stocks that I own. One is FDG Fording Canadian Trust which owns 60% of the Elk River Coal operation in Canada, and worth 13.4MM T of coal per year. The other two trade on the Toronto exchange, WTN.to Western Canadian Coal and GCE.to Grand Cache Coal.

Both WTN and GCE now trade at a forward p/e of 2, given the new $300/t met coal price which they are getting immediately. FDG must ship Q2-08 at the old price of $92/T, but will earn around $18.00/share for the four quarters starting 7-8.

[sunrises]

Interesting article. Thank you.

[rearden215]

When the effects of the rains in Australia subside, watch for met coal prices to free fall back into the non-rarified atmosphere. And, don't forget any potential fallout from the US recession upon Europe- a mighty player in met coal purchases at present.

When all this happens, the folks down at CNX Marine Terminal can go back to being the Maytag repairmen roles they had become so accustomed to.