By Christopher Coats and Garrett Devine, SNL Energy
Production costs for a handful of U.S. coal producers declined in 2014, but some Illinois Basin producers actually reported higher costs, according to a cost-of-coal-sales-per-ton analysis by SNL Energy. After a dramatic rise in the cost of coal sales per ton from 2009 to 2012, increasing an average of 38.9% for the period, the industry saw costs level out in 2013, with a few producers continuing to benefit from cost-cutting measures in 2014.
Only Alpha Natural Resources reported a significant drop in costs in 2014 at nearly $40/ton, down 12.7% from 2013, but still shy of the company’s 2009 rate of $34.26/ton. Alpha’s reduction came as a result of a strong cost performance in the East during 2014, according to Chairman and CEO Kevin Crutchfield, who predicted further cost savings through the rest of this year in an earnings report in February.
“Importantly, we expect to achieve additional cost savings in 2015, and we will continue to take aggressive actions to preserve flexibility and respond quickly to changing and challenging market conditions, including a reduction of [selling, general and administrative expense] and overhead costs in the range of $60 million to $75 million annually throughout the organization to adjust both the operational footprint and support services to our 2015 production guidance,” he said. Alpha also announced plans to decrease coal production by a fifth at its Eastern mines.
Meanwhile, Illinois Basin producer Foresight Energy ended the year with the largest percentage increase in cost of coal sales per ton, rising 8.7% from 2013 to $21.24/ton, from $19.53/ton the year before.
In February, company officials explained the increase as the result of increased production costs at the Sugar Camp and Hillsboro operations, the latter of which was struck by an underground fire in August 2014 that halted production. Foresight could soon see a reversal of this upward trend upon completion of the announced acquisition of a controlling stake in the company by privately held Murray Energy, which is expected to offer potential areas of cost savings.
With facilities owned by both companies located near one another, Foresight expects savings from the use of Murray’s equipment, the reduction of redundant positions and the ability to purchase supplies on a larger scale. The deal, announced March 15, earned praise from analysts, due mainly to the benefit it would provide to Foresight and its ability to meet distribution goals without issuing dilutive equity.
After a steady climb in cost from 2009 to 2013, Cloud Peak Energy enjoyed a slight decline in 2014 despite rail constraints, with costs of coal sales per ton down 3.14% from the previous year to end 2014 at $12.54/ton. Company President and CEO Colin Marshall told investors in February that keeping costs under control will be a priority for the year ahead, though not at a cost to needed investment in equipment. “I am confident that our strong balance sheet with lower liabilities and good liquidity will allow us to work through these difficult markets,” Marshall said. “We will continue to look for opportunities to reduce losses on exports as we wait for international markets to improve so we can benefit from our increased terminal capacity.”
Alliance Resource Partners rounded out those companies that saw any sort of decline in costs, which declined slightly to $34.82/ton, 3.5% below 2013’s level.
Even as costs continue to level out, U.S. producers continue to face the same challenges that have weighed heavily on the industry since 2011, including a more stringent regulatory environment and competition from lower-cost energy alternatives.
Despite the slight drop in cost per ton for the year, Joseph Craft, president and CEO of Alliance, said he expects those challenges to continue, putting further pressure on the ability of producers to keep costs low. “As we enter 2015, U.S. thermal coal markets continue to be faced with significant challenges,” Craft said. “Tepid power demand, weak export demand, regulatory pressures and low natural gas prices are expected to pressure coal prices this year. While we are also impacted by these market pressures, ARLP remains well positioned to grow its distributable cash flow again in 2015.”
In the case of metallurgical coal producers, high costs have made it difficult for U.S. firms to remain competitive. According to Jack Porco, president and chief commercial officer of Xcoal Energy & Resources that this challenge was causing U.S. met producers to lose out on their share of the seaborne market.
Weak met coal prices have continued to put stress on revenue, with Rhino Resource Partners’ revenues per ton of coal falling 11.5% in 2014 from the year before. Alpha followed just behind with a 10.1% drop for the period.
Looking ahead, many analysts believe that U.S. producers will see little price relief this year. On March 16, Cowen & Co. LLC reported that the second-quarter 2015 international coking coal benchmark price settled at $109.50/metric ton.