Arch Coal 2Q15 Earnings Call Notes

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Expect thermal coal demand to fall by 80m tons

“While the summer has been a bit warmer than some may have expected, natural gas prices continue to trade in the $2.75 to $2.85 range, a level low enough to displace even PRB coal in some regions. As we noted before, the MATS regulations are expected to drive the closures of around 20-gigawatts of coal-based generating capacity this year, which will take a toll on coal consumption as well. As a result Arch continues to expect domestic thermal coal demand to fall by around 80 million tons in 2015 when compared to 2014”

Supreme court took exception to MATS rule, but generators already put their strategies into place a long time ago

“Of course as most of you know, the Supreme Court took exception to the MATS rule during the quarter, scolding the EPA for failing to consider the significant cost of the rule against its relatively modest benefits; however, the reality is that most generators forged their MATS compliance strategies long ago, so we don’t expect a significant change of the course in terms of the coal plant retirements. In a broader sense though, the ruling could have significant impact on the timing and structure of the coming Clean Power Plant rules.”

On a positive note, supply rationalization is happening more quickly than expected

“On a positive note and in a sign that low prices are bringing the market into better balance, supply rationalization is happening quicker than expected. ”

Longer term should be a buildout of generation internationally, but US coal not as competitive

“On the international side the picture is mixed. Longer-term we continue to see build-out of coal-based generation, particularly in China, India and Southeast Asia. Unfortunately currency rates and oversupply have eroded U.S. competitiveness in many markets”

Steel mill utilization reasonably strong

“Domestically, the strengthening U.S. economy has kept steel mill utilization reasonably strong, as near record levels of auto sales and a strong construction environment have helped compensate for a sharply lower demand from the drilling industry.”

There’s a lot of pressure on higher cost production in the East, Powder River Basin is a little better positioned

“as we sit here today we think there’s a lot of pressure on higher cost production, particularly in the east; and we think our position in the Powder River Basin places us very well for not only the domestic markets but we see improvements in the international markets with additional access off the West Coast, we do think that we’re well placed to take advantage of both of those markets.”

A lot of smaller mines in Central App will probably be closed for good

“From what I’ve seen in Central App, a lot of these mines that are closing, particularly the smaller ones, I think are going for good. And the cost to reopen them, I think, is going to be very difficult when you look at terms (26:09) of regional natural gas pricing.”