Patriot has coal recovery 'within our sights'
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By: Liezel Hill
27th October 2009
Updated 3 hours ago
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TORONTO (miningweekly.com) – US coal miner Patriot Coal is optimistic that demand for its steelmaking and thermal coal will recover strongly in the “near term”, CEO Richard Whiting said on Tuesday.
He said that markets for both coal segments remain "challenging", but that the company expects to see improvements during 2010.
“We believe the markets are at an inflection point, poised to see a substantial improvement in demand in 2010, in both metallurgical and thermal coals,” Whiting said on a conference call.
Like its peers, Patriot responded to soft demand late last year and into 2009 by curtailing production and renegotiating some supply contracts with customers.
The company produces both steam and metallurgical coal from operations in West Virginia and Kentucky
“While we don't expect the market recovery to be in full swing by early 2010, we are optimistic that the timeline for recovery is more within our sights than it seemed just a quarter ago,” said CFO Mark Schroeder.
MET COAL REBOUNDS
Patriot sold 6,3-million tons of thermal and 1.5-million tons of metallurgical coal in the third quarter, compared with 7,3-million and 1-million tons respectively, in the previous quarter.
Metallurgical volumes were higher in the third quarter as customers took more consistent delivery of contracted tons, the company said
The domestic steel industry began a slow recovery in the second quarter, and has shown steady improvement since then, Whiting commented.
Internationally, demand from Asia, and China in particular, has firmed, and the company expects to sell “several hundred thousand” tons to Asian markets in the fourth quarter of 2009 and into next year, he said.
“In fact, Patriot recently entered into an agreement that we believe will represent the first meaningful shipments of US high volatile met coal to China,” Whiting said.
He said there is no doubt that metallurgical coal demand around the world is rebounding.
“And because of the limited availability of high quality met coal in the world, our forecasts show demand outstripping supply, and therefore driving up met pricing as we move into and through 2010.”
THERMAL
Patriot is also expecting to see domestic demand for thermal coal improve “significantly” in the next six to nine months.
Supply will be constrained by the delays that miners face getting new surface mining permits, and a lot of production that has been taken offline may actually leave the market permanently, Whiting speculated.
“We believe that as markets rebound, supply will be hard pressed to keep up with demand, particularly in central Appalachia.”
Demand will likely exceed supply for US thermal coal, especially for central Appalachia, around the end of 2010, he said.
“And the change from oversupply to undersupply may be abrupt, taking place over a very short period of time.
“With upward pressure on demand and downward pressure on supply, we believe the effect on pricing will be meaningful.”
Although inventories remain high, customer sentiment showing signs of improvement.
In the last month, utility and industrial customers that had previously indicated they wanted to discuss deferrals with Patriot are now indicating these discussions are no longer necessary, Whiting said.
When market conditions warrant, the group could double metallurgical coal volumes “relatively quickly” from current about 5-million tons to around 9,5-million tons, while thermal coal production could also be increased by several million tons annually.
“We have the flexibility to selectively increase production as conditions warrant by restarting idled properties, adding projects into the pipeline – both brownfield and greenfield – and pursuing bold-on acquisitions,” Schroeder said.
Patriot reported net income of $52,8-million for the third quarter, a decline of 26% compared with the same period in 2009, but higher than analysts had generally predicted.
The company realised an average of $62,95/t for its coal during the quarter, compared with $58,66/t a year earlier.
Patriot also reported that it restructured three thermal coal contracts, resulting in compensation for shortfalls in contracted shipments.
“Overall, a decent quarter,” said Dahlman Rose & Co analyst Daniel Scott.
“Patriot was able to record fair results this quarter thanks to metallurgical sales and
contract buyouts.”
Edited by: Liezel Hill
