Consensus building that met coal prices will settle above last benchmark
by Dan Lowrey
A consensus is building among Wall Street analysts that the fourth-quarter metallurgical coal benchmark price will settle north of the $145/tonne set in the third quarter as strength in spot pricing shows
demand is accelerating.
 
FBR Capital Markets analyst Mitesh Thakkar is out with a note Sept. 9 putting his fourth-quarter benchmark forecast at $155/tonne, “given the recent improvement in spot market and continued positive indicators on the demand side.”
 
Thakkar said there are signs of stronger demand for Australian met coal, with exports there registering solid year-over-year and sequential growth. “While production cuts have increased in US, we believe some more are required to offset low cost supply increases in 2014 for continued pricing improvement,” he wrote.
 
BB&T Capital Markets analyst Mark Levin recently said he expects that the fourth-quarter metallurgical coal price benchmark will settle at $150/tonne, but he questioned if the price increase is sustainable given the lack of production rationalization in high-cost areas including the U.S.
 
Spot prices for premium low vol coking coal have continued to climb from their July lows. The third-quarter settlement of $145/tonne was the lowest settlement since the fiscal year 2009 price of $129/tonne in the aftermath of the global financial crisis.
 
Many insiders say that, at below $150/tonne, a good portion of U.S. met coal production is out of the money.
Among U.S. producers, Alpha Natural Resources Inc. and Arch Coal Inc. have taken the most aggressive steps recently to reduce met coal production from operations in Appalachia. Both companies’ earnings are highly leveraged to the price of met coal.
 
Along with Alpha, Thakkar said Canadian met coal producer Teck Resources Ltd. and Alabama-based met coal producer Walter Energy Inc. are most “levered” to improvement in met coal pricing.
The fourth-quarter met coal benchmark settlement is expected to be formalized in the next few weeks.