Arch Coal 2Q15 Earnings Call Notes

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.”

Arch Coal 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Even despite a cool summer, utilities are still interested in coal

“Turning now thermal markets, we still expect domestic coal consumption to be up 10 million tons or so in 2014 and that’s taking into account the cooler summer we’ve had in coal concerning regions in the past 30 years. Even with the disappointing summer burn, we continue to see real interest from our customers and layering in significant tonnage for multiple years.”

Some customers are taking coal plants offline in order to ensure that they have enough coal for the winter

“We’re seeing customers who are concerned about rail delivery, take coal plants offline during the season in order to ensure that they have enough coal in hand to meet demand this winter.”

60 GW of coal will likely retire by 2018, 20GW to close next year

“We estimate that 60 gigawatts of coal generating capacity will likely retire by 2018, nearly a third of those plants are already closed. In 2015, we anticipate approximately 20 gigawatts will close, affecting up to 25 million tons of demand on a gross basis”

Met coal markets are bottoming out

“we believe met markets are in the process bottoming out. Benchmark prices are fallen below the cost for one-third or more of global producers and supply cuts are underway. Those cuts will help to offset new supply that is coming to the market over the last several years.”

The railroads are trying to right their ship slowly but surely

“We’re reading everything that everybody else is about the delayed improvements in the railroad, but with our conversations with all the railroads, particularly the western rail roads, we’re confident with the progress they’re making and in terms of capital spend. They’re bringing crews on. That obviously takes time to bring in power on. They’re trying to improve their velocity, but it just takes time. ‘

Demand for met coal in US and Europe does continue to be there

“the capacity factors have hung in there in mid 70s range and we would expect that to continue and with our second biggest market in Europe we’ve also been relatively pleased with the demand that we’ve seen there. Now, we’re not happy with the pricing, but certainly the demand in the U.S. and the Europe continues to be there.”

We feel like we’ve responded appropriately to the market

“I think what you’ve seen over the last two or three years is that we’ve responded appropriately to the market. Sitting here today, we’ve got our portfolio down to pretty strong set of operations and are cash flow positive and as markets move up and markets move down, we’ll address it.”

Arch Coal 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Believe we are close to the bottom for met coal

“Of course, we believe that we are close to the bottom in the met markets today. Global production curtailments have accelerated in 2014, and by our account total nearly 20 million tons thus far.”

Thermal coal consumption up despite mild summer

“Turning now to domestic thermal markets, we expect coal consumption to be up by 20 millions tons or so over last year, and that’s with the cooler summer weather that’s been playing out today.”

Coal still in the money vs. natural gas and stockpiles are low

“Western coal remains in the money compared with current natural gas prices and coal stockpiles at generators are on the low end in some cases, well below targeted levels”

Seeing interest in thermal for 15 16 17

“as Paul indicated we went out and we continue to see a lot of interest 15, 16, 17 in the marketplace that we think are going to be a pretty decent pricing.”

confident that we can carry cost controls into 2015

“it is really a credit to Paul and his team, how hard they’ve worked on cost control and management of our capital and you are really starting to see this. I’m confident that we can carry that not only in the back half of the year, but as we move into 2015”

Spot pricing for met coal coming at 112-114 range

“I would tell you, with third-quarter benchmark at 120, we are seeing spot kind of we’re around that 112 to 114 range. We are certainly disappointed in the pricing, but we don’t think that this pricing sustainable. When you look at the percentage of suppliers in the seaborne market that are not generating any positive cash that percentage is pretty significant.”

Still 25 m tons of oversupply in the market today

“Currently, we see about, call it, 25 plus or minus, million tons of oversupply in the market today. We think that as we move into 2015 and you get a full year of these curtailments, that that will have an impact”

When met markets correct, they over correct

“We don’t see a whole lot improvement for the balance of this year, but as we move into 2015 there’s one thing that we know about met market is they correct, and they often over correct.’

We feel very comfortable with our position

“suffice it to say we feel very comfortable with our position and with future opportunities and continue to be able to manage our liquidity aggressively as we move forward if the challenging markets persist.”

Arch Coal 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Met coal prices unsustainable, but will remain weak throughout 2014

“current price levels are unsustainable for much of the 325 million tons of seaborne met production in operation today. Yet despite some of the supply corrections that have taken place, we expect metallurgical markets to remain soft throughout 2014. In order to successfully navigate these markets, we’ve elected to proactively scale back at metallurgical coal volumes to go further this year.”

Thermal coal is rebounding though

“One market where recovery is evident is the domestic thermal market. U.S. electric generation hit record levels in January and February, benefiting from a cold winter. In fact we may see power demand increase in 2014 after three years of decline.”

Met production shut down, but can come back to market relatively quickly

“I think on the flip side when the market does come back, we will have the opportunity to ramp these mines back up rather quickly”

Still 15-20-25 MT oversupplied in Met coal, wouldn’t take too much to get market back to balance

“I mean I have said 15 million to 20 million in the past; I mean I would say today, it’s probably in that 15 to 20, 25 range plus or minus. We are encouraged over the last week or so about some of the rationalization that we are hearing about, not in Australia, U.S. and Canada, let’s call it 5 million to 10 million tons. We think that’s encouraging. We think the 3% growth in steel demand is encouraging and we think thing is going to balance itself out. And we think we are not forecasting any material improvement in the met market this year but what could potentially accelerate that is if you start seeing more and more people pulling production off. And we think at the second quarter benchmark of 120, the fact that the Australian dollars move back up to $0.93, $0.94, those guys are probably looking at where they might trend some of the production. So, on a 325 million ton market, it wouldn’t take a whole lot to balance this thing pretty quick.”

I think Met has bottomed out

“I think we have bottomed out. And I think given where people’s cost structure are and the fact that you’ve got a large percentage of suppliers in the world market that have a cost structure that don’t work, something’s got to change.

And I think you are starting to see the early part of that with some of these cut backs. I don’t know that we have a magic number out there, but clearly as Paul indicated, we’ve set our self up in a manner that allows us to respond pretty quickly.”

We’re not bringing back volume unless it’s sustainable

“we are not going to bring volume back on for a quarter or two improvement, we want to see something that is more multi-year.”

Arch Coal 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“PRB coal is competitively positioned versus natural gas. PRB coal plants have been running all year with gas prices averaging in the 365 range. Days of supply at PRB serve plants declined to 60 days at the end of September and are likely to fall below this, this winter. On the national level, customer coal stockpiles could end the year around 150 million tons. That’s more than 30 million ton drawdown during the course of 2013. US coal demand is exceeding production and supply curtailments, particularly in Central App are accelerating. Looking ahead, even if we play at a scenario where coal demand is flat in 2014, we are on pace for another 30 million ton drawdown of stockpiles next year all else equal. With such a drop inventories will fall to levels not seen since 2005. That’s why we believe coal markets could become much more dynamic next year as compared to what we have seen during the last 18 months.”

“Brandon we are certainly seeing some positive signs in the PRB, inventories are coming down, we like where natural gas prices are right now, with normalized weather the balance of the year we think we really could be setting ourself up for a much better 2014 where PRB is concerned.”

“I think we would need to see a little bit more improvement on the met side, certainly inventories get down a little bit more in the PRB, activity pick-up in the PRB, see some price appreciation out there – those two things would help us.”

“My sense, across the industry and not just in the peer that, you know, equipment replacements have slowed and clearly there has been maintenance deferrals. And those are going to ultimately eat into any reaction we’re going to see. What’s more, as I’ve said in the past, this isn’t the basin I left 7, 8, 10 years ago. It’s not quite as easy to turn up the production as it was then.”

“we think there’s quite a bit more coal that needs to be purchased in 2014. You could start seeing some price appreciation as we move into next calendar year.”

“our [met coal] domestic customers continue to run their plants at pretty high capacity factors. They have been in the mid to high 70s most of the year. So, we think that the demand will be there. We’ve enjoyed a long-term relationship with our domestic customers I think.”

Arch Coal 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“On the domestic thermal front, we believe that we’re in early stages of a multiyear recovery from PRB. Natural gas prices are less of a headwind. Weather has normalized to some extent, and power demand’s up. Coal has regained ground in the electric generation market. U.S. production is down, and coal stockpiles at PRB soar [ph] plans are on the decline. In fact, we believe the summer burn season will drive days of the supply and PRB customers down to below the 5-year average. This trend is a significant turnaround from where we were just a year ago and is leading to increased customer interest in securing tonnage.”

“While met coal demand remains relatively stable, driven in part by solid utilization rates at U.S. steel mills, prices are muted, and supply rationalization to date has not been sufficient to balance the market.”

“Michael, if you just look at industry data for June 30, production industry was down about 20 million tons. A big part of that is, in fact, about 12 million or 13 million tons. We think cash is going to continue to be under pressure. We think you will continue to see that transition away from the thermal market into the met market, and there’ll be further pressure on shutdowns in terms of supply. If you look at gas prices right now at $3.50, Central App thermal coal will not dispatch at $3.50 gas. And we think PRB, Western Bit, even Illinois will do fine with gas prices in that level. But as you’ve heard me say many times, we need somewhere between $4.50 and $5 gas to allow the thermal coal to dispatch either. Internal forecast for 2013 at Central App about 20 million, 21 million tons down over 2012. So down around that 128 million ton range for this year. I think, quite frankly, from what we’ve seen first half, that may be high. So there might be more pressure on that the back half.”

“there still is exit supply in the market, and I — it’s a tough number to gauge, but I think we believe that somewhere between 15 billion and 25 billion tons on a worldwide basis. But it appears to be more heavily weighted towards low-vol coals, which is why I think you’re seeing the benchmark pricing down. Clearly, Australian dollar drop has helped those producers, but I think what’s being lost in this is the relative strength of the high-vol coals into Europe. We’re down through the year, maybe $5 or $8, but it’s not nearly the percentage of what we’re seeing in — on the benchmark pricing.”

“I got to tell you everybody in this environment is pretty inwardly focused, I would say. Not that you won’t see some M&A, but everybody’s focused on managing their balance sheet, making sure they get through this tough period, and let’s just see where goes. But if you’re a Central App supplier and you’ve got some higher costs and pretty much thermal coal and you don’t have any infrastructure in place to access the international markets, I think you’re going to be pretty challenged over the next couple of years. So whether they go away, become part of another company, I think time will tell.”

“we’ve got over 400 million tons of high-quality met with a cost structure we think can be competitive here and around the world. And we want to make sure that we protect those reserves and aren’t forcing them into a market that doesn’t want them.”

“Chris, as I indicated, in the 300 million ton [met] market, we think there is a pretty significant percentage of people that have economics that don’t work at 145…we think it’s probably at least 20%”

“I can tell you there’s a lot of high-cost met out there, whether it’s in the U.S., Australia or Canada. And those are things that some people are going to face between now and, say, over the next few quarters. So we think there’s rationalization coming. We just can’t tell you how quick that’s going to take place, but what we can tell you is Arch has got itself positioned where it will be standing when all this shakes out.”

“If you look globally, there’s 280 gigawatts of new coal power generation that are being built. I mean, these aren’t being discussed, planned. They are being built and are going to come on over the next 3 or 4 years, needing 800 million to 900 million tonnage of additional supplies. So all of those things, we think, will drive improvements in the market. I mean, it’s — as John talked about our cash position, we want to make sure that we got liquidity in place to get through this tough period. We can’t tell you if it’s 6 months, 12 months or 18 months, but what we can tell you is Arch will be around once we get through it.”