Matt Day, Wall Street Journal, April 29 2012
It's been a bleak spring for U.S. coal miners—and the question for Arch Coal Inc. ACI -1.66% and Alpha Natural Resources Inc. ANR -3.88% is whether they can even meet lowered expectations.
Arch and Alpha, the No. 2 and No. 3 miners by production, report their earnings for the first three months of the year on Tuesday and Thursday, respectively.
Demand for the fuel from U.S. power plants is running about 20% lower than last year, according to government estimates, as utilities favor cheaper natural gas, and unusually warm weather limits total electricity use. Coal-company shares have crumbled under expectations that sagging demand may last through the year. On a 52-week basis, shares of both Arch and Alpha are down 72%.
It's been a bleak spring for U.S. coal miners.
"These are some of the most challenging times that some of these coal companies have ever seen," said Mark Levin, a coal analyst with BB&T Capital Markets. "It's hard for me to imagine that things could get a whole lot worse."
Arch is expected to see its profit fall by 44%, to $33 million. Alpha—still struggling to digest Massey Energy Inc. after spending $7.1 billion to acquire the competitor last year—is seen swinging to a first-quarter loss of $18 million, down from a year-ago profit of $49 million.
Whether they'll get better anytime soon is an open question. Coal companies are facing what is expected to be a decades-long shift in the way the U.S. generates electricity. A set of increasingly stringent federal air-pollution regulations—a much-delayed legacy of amendments to the Clean Air Act first enacted in 1990—are scheduled to come online during the next several years, pushing utilities away from coal and toward use of cleaner-burning fuels.
And this year, an unusually warm winter and spring limited electricity demand, while an unprecedented glut of natural gas made that fuel more attractive.
Weak demand has caused coal inventories to pile up at utilities to the point where some are delaying contracted deliveries.
Peabody Energy Corp., BTU -1.27% the top U.S.-based coal producer, says that total U.S. coal demand will likely fall this year by about 10%.
But Peabody has mines in Australia feeding coal-hungry Asia, which is shielding it from the worst of the weakness in the U.S. market. Also, analysts say Peabody has done a superior job of streamlining its operations, reporting on April 19 that first-quarter earnings fell just 2%.
Arch and Alpha don't have the luxury of overseas mines. Investors are going to scrutinize their success in limiting costs, cutting production, and trying to find a home for their coal abroad.
Companies "are going to have to turn over every rock," said Shneur Gershuni, an analyst with UBS.
Enough production cuts could eventually prop up domestic coal prices, giving producers something to cheer about later on this year.
Also, Arch, Alpha and the rest of the industry hope that increased coal demand from fast-growing China and India will help turn the tide. But that poses additional problems. U.S. companies are scrambling to increase their access to ports in the Gulf Coast and East Coast to ship coal abroad.
Arch's and Alpha's export outlooks, as well as sales forecasts for the higher-priced types of coal used in steelmaking, will be key to how investors view the industry's prospects in the year ahead.
Write to Matt Day at matt.day@dowjones.com
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