The Driving Force Behind Recent Coal Mergers? Metallurgical Coal

by Erica Peterson on June 13, 2011

The coal industry and politicians have done a good job making it clear that Kentucky is a coal state. But not all coal is equal. Not chemically, not geologically and not financially.  And some types of coal are much more valuable than others.

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The relative value of different types of coal is one force behind recent coal mergers. Earlier this month, Massey Energy was bought by Alpha Natural Resources. James River Coal absorbed International Resource Partners in March, and Arch Coal is trying to acquire  International Coal Group.

What all of those mergers have in common is they give the buyers more access to a special type of coal. Metallurgical coal. William Watson of the U.S. Energy Information Administration says the main benefit of metallurgical , or “met” coal, is that it’s really, really strong.

“The advantage of the low-volatility coal is, once it’s turned into coke, which is just coal with a lot of the gas driven out of it, it’s a very strong thing,” Watson said. “It’s not going to break down in the big furnaces where you’re melting iron ore and turning it into various steel products.”

Metallurgical coal looks just like the so-called thermal or steam coal that’s burned in power plants for electricity. It’s mined the same way, too, and there are reserves in West Virginia and eastern Kentucky. But the reason companies have been swallowing up other companies to increase their met coal reserves is that sometimes they can get more than three times what thermal coal brings in.

Matt Christy is an equity analyst for Standard and Poor’s.

“Central Appalachian coal prices for thermal are trading at around mid-$70 per ton. PRB coal you’re looking at maybe $12 give or take 10 cents,” he said. “And according to some sources, metallurgical coal is trading at around $300 per ton. So that differential right there just shows that a higher reserve base of metallurgical coal, you’re going to have a higher value.”

There are various reasons why metallurgical coal is so valuable right now, but it all stems from a need for steel. Americans have been producing cars and driving them for a century, so there are a lot of junk cars that can be recycled into steel. But in other countries, especially ones that are seeing lots of new growth, that’s not the case.

Christy says those countries are the final destination for most of Appalachia’s metallurgical coal.

“When you look at steel production, most of it’s centered in and around some of the emerging markets—Brazil, India, China,” Christy said. “They’re the highest users of steel, so it makes sense to have the smelters in those locations. So most of the metallurgical coal is going to overseas locations.”

So, companies are snapping up these valuable reserves to feed the Chinese and Indian steel industries. But metallurgical coal may not be the savior of the Appalachian coal industry, which, for the past fifty years, has been producing less and less coal for use in America.

“Metallurgical coal will help, but it’s not going to be a sudden resurgence of the market just driven solely by metallurgical coal,” said John Morgan, the president of Morgan Worldwide, a Lexington-based mining consulting firm. He says the high prices and demand for American metallurgical coal are partly driven by reduced production in Australia, where metallurgical coal mines were stalled by flooding earlier this year.

But even if metallurgical coal prices remain high, Morgan says the reserves aren’t big enough to make up for a drop in production of coal that’s burned for electricity.

“It will provide added revenue to some mining companies to allow them to continue and reinvest,” he said. “But it’s not the largest percentage of the production and in a lot of cases you need to be able to produce steam coal as well as metallurgical coal. So I think that the long-term trends, because of the resource base, is going to be for a continued decline in West Virginia and east Kentucky for a number of years.”

In 2009, more than 4/5 of the coal produced in the United States was thermal coal that was burned for electricity.

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