Posted: Friday, June 14, 2013 1:32 PM ET
The coal industry got another dose of bad news this week; with U.S. coal producers reporting a 31% drop in exports during the month of April.
One of the biggest problems for the industry as a whole is oversupply in China. With growth in China slowing, the country is not importing the same levels of coal that it was just a few years ago. As a result of the lower demand in China, the industry is in a place where there is more coal than the country's industry needs.
Not only is demand weakening in China, but producers have been increasing their outputs. The world's biggest producer of coal, BHP Billiton (BHP), recently had multi-year projects come online, and it is not the only producer that has had projects come online.
While exports were rising, it made sense for producers to start new projects to keep up with growing demand, but these projects are coming online at the worst time possible. Last year, coal exports hit a record at 126 million short tons, and while some analysts believed a new record would be set this year, that is not turning out to be the case.
Ernie Thrasher, chief executive of XCoal, which is a U.S. coal trader, now believes that total U.S. exports of coal will fall by 10% to 15%.
Exports are a major part of business for U.S. coal producers, with close to 70% of all metallurgical coal produced in the U.S. being shipped abroad. If exports continue to fall, the oversupply problem will continue to grow.
Adding additional pressures to U.S. producers is the higher cost associated with coal production in the U.S. versus other areas in the world. The average cost to produce one metric ton for U.S. producers runs between $135 and $145, versus just $110 a metric ton for Australia-based BHP.
The benchmark price for coal is expected to fall to around $150 a metric ton in the next few weeks, which will put extreme pressure on U.S. coal producers which are paying close to that to produce the coal.
The impacts are already apparent. Virginia-based Alpha Natural Resources (ANR) recently said that it plans to shut down a mine located in West Virginia. Another U.S. producer, Arch Coal (ACI) plans to stop production at two of its mines located in Kentucky.
With falling coal prices, lower demand for coal in Asia, and cheaper coal in other parts of the world, the U.S. coal industry seems to be in serious trouble.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.
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