Metallurgical Coal to Stay Cheap for Years, Moody’s Says

Additional global supply of metallurgical coal will keep the price of the steelmaking raw material close to current low levels for the next few years, Moody’s Investors Service said.

Most U.S. production is unprofitable at current prices while as much as half of global output is making a loss, Anna Zubets-Anderson, a Moody’s analyst in New York, said today in a statement from the ratings company.

The commodity has slumped on a slowdown in demand from China, the world’s largest steelmaker, and an expansion of coal output in Australia. The market was oversupplied by about 30 million metric tons at the end of the first quarter, despite global production cuts of more than 40 million tons in the past two years, Moody’s estimated today in a separate report.

The international quarterly benchmark price for metallurgical coal, also called coking coal, is at a six-year low of $120 a ton. The current price is unsustainable and will recover to $135 to $145 by the end of 2015, Moody’s said.

As many as a quarter of producers in Queensland, Australia, are operating at a loss, according to the report. Some of those unprofitable miners have been reluctant to scale back because of transportation contracts that require them to pay up even if there’s no coal to be moved, Moody’s said.

U.S. coking coal miners won’t be profitable as a group until the benchmark price reaches $160 to $170, Moody’s said. They could supply over 50 million metric tons this year while burning more than $1 billion in cash, it said.

Walter, Peabody

North American suppliers have already started cutting back. Birmingham, Alabama-based Walter Energy Inc. began idling its British Columbia mines in April. U.S. producers Cliffs Natural Resources Inc. and Alpha Natural Resources Inc. announced mine closings last month.

Peabody Energy Corp. has the strongest position among U.S. producers, Moody’s said. Still, the St. Louis-based company isn’t likely to be free cash flow positive again until metallurgical exceeds $145, the ratings company said. Free cash flow is operating cash flow minus capital spending.

A spokesman for Peabody didn’t immediately respond to messages seeking comment.

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