Reuters: Steel Sector Fuels Demand for Coking Coal

Steel Sector Fuels Demand for Coking Coal
January 30, 2005 10:05:00 AM ET
By Steve James

NEW YORK (Reuters) - Mining companies, raking in big profits from suddenly sky-high coal prices, are also poised to cash-in on the booming steel industry's need for coke to fire blast furnaces.

Massey Energy Co. (MEE), one of the ``Big Four'' U.S. coal producers, said on Friday it is increasing production of metallurgical, or coking coal, over the next few years as demand from steel manufacturers grows.

``With steel demand and prices as they are, they (steel makers) want maximum coking to run their ovens with our high- quality coke,'' Massey Chairman and Chief Executive Officer Don Blankenship told Wall Street analysts on a conference call. ``It presents more market opportunities.''

Richmond, Virginia-based Massey produced 42 million tons of coal during 2004, three-quarters of it steam coal, which is primarily sold to utilities to fuel power plants.

But 10 million of those 42 million tons were metallurgical coal and Massey expects the amount to rise to 13 million to 14 million tons in 2005.

Peabody Energy Corp. (BTU), whose coal produces more than 10 percent of all U.S. electricity, said it will use a portion of its capital expenditure this year to extend the life of mines that supply the metallurgical markets.

And Consol Energy Inc. (CNX) is considering a substantial investment to expand the Buchanan mine in Virginia, which produces 5 million tons of coking coal per year.

Consol is bullish on the coking coal markets, where demand has allowed it to lock-up all current met coal production under contracts through 2007.

``We will continue to be a player in the metallurgical coal markets,'' CEO Brett Harvey told analysts.

The sudden enthusiasm for humble coke is due to the current boom in steel-making, which was fueled in part by China's economic growth.

``Current conditions suggest that the increase in metallurgical coal demand in China, India and Japan may very well outstrip the ability of suppliers to respond,'' Massey said on Thursday when announcing a fourth-quarter profit after a loss the year before.

Asked about increased production targets for metal coal, Massey's Blankenship said: ``We have some of the strongest metallurgical coal in the world.

``We think the metal market will be steady to up slightly in '05. It favors us in a market where they want to run coke ovens at the highest capacity.''

Only a handful of companies in Central Appalachia, where Massey mines much of its coal, have significant metallurgical coal reserves, he said.

Massey expects metal coal production of around 15 million tons in 2006 and it could go up to 18 million in 2007.

``It could expand, but we don't have market commitment for those tons,'' said Blankenship.

Coal prices have soared in the last two years as higher natural gas and oil prices have seen many utilities switch to coal for their power plants. For example, Eastern (U.S.) rail coal, which was selling on the spot market for around $28 in October 2002, is now going for around $58.

And there is no end in sight for the boom in coal, according to Blankenship.

``The market for coal here and abroad remains very healthy,'' he said. ``High gas prices favor coal as the fuel of choice. Total U.S. coal production was up 3 percent in 2004 and the demand for metallurgical coal has allowed the strong prices to persist.'' But transportation problems -- railroad bottlenecks and barge delays in cold weather -- continue to plague coal shipments.

Asked about the coal stockpiles of utilities, he said that, on average, ``they are 6 to 8 days below where they want to be and some are 20 days below.''

© 2005 Reuters