beegdawg007

Could Coal Recover?

Regarding supply vs. demand... this time its different!
Really....

What has changed..

For the following reasons, coking coal miners can now cut back on supply in 2009 to map it closely to demand.

1. Most are comming up on what what will be the three best quarters they have ever had. Q408, Q109 and Q210. Q210 will be strong because spillover tonnage that was sold at $300/tonne for delivery through March 2009 will be delivered in Q2 of 2010. Because steel mills are postponing deliveries, there is a significant quantity of $300/tonne coking coal that will be delivered in the spring of 2009.

2. The Brazilian coal year runs July 1 to June 30. Companies like WLT have sold large quantitites to Brazil.

3. The balance sheets are exceptionally strong, so miners do not need to sell coking coal at marginal profits just to make interest payments.

4. Labor is stil tight, and most miners have had their employees working overtime just to meet demand. They can simply stop hiriing, move crews to the most productive portions of the mine, and discontinue any overtime if they need to.

5. Most coking coal miners believe that there is a serious shortage of coking coal in the long run. I doubt they will sell much coking coal at $90/tonne in 2009 if they believe that same coal will fetch $200/tonne in 2010.

6. Several miners have already put the brakes on expansion plans and idled poorly producing portions of their operations. Many of the smaller mining operations can not produce coking coal FOB port for less than $90/tonne. Very few of these companies are going to risk going broke by selling coking coal for less than it cost to produce.

7. The one very vulnerable and large producer of coking coal, TCK, has already indicated a willingness to sell as much as 20% of Elk Valley to strengthen its balance sheet. Companies like BTU, and ACI have indicated an interest in expanding, and major steel companies like Posko and Nippon steel have also shown interest in locking in a long term supplyl of met coal.

I think that this time, we will see very protracted negotiations and prices that will likely surprise on the high side simply because the miners are willing to curtail supply to meet demand. Alwso, many of the met coal miners are also thermal coal miners. Those companies have 2009 thermal coal sales mostly locked by now at very favorable prices and many have high percentage of 2010 thermal coal sales locked. WLT, for example sold all of its thermal coal for three years at $100/ton. And BTU and Massey have most of their 2009 thermal coal now under contract with as much as 80% of 2010 thermal coal under contract.

The met coal miners are actually in a very strong position now vs. anytime during the previous 10 years or so...