Arch Coal Inc. (ACI - Analyst Report) made a strategic move to expand its footprint in the world’s second largest economy, China. The company’s business wing Asia-Pacific Pte. Ltd. established operations in Beijing to tap the growing metallurgical and thermal coal demand overseas.
The operations in Beijing will promote easy and cost-effective metallurgical and thermal coal transactions as well as enhance logistic capabilities. This step would also boost the marketability of Arch Coal’s metallurgical coal production especially with the addition of high-volatile product from the Leer Mine located in Appalachia in the U.S.
Moreover, the company will be able to easily access the neighboring coal markets of India, Malaysia, Thailand, Vietnam and South Korea as well as Japan.
Its domestic coal businesses were hit in 2012 by low natural gas prices which forced Arch Coal to look for international buyers. Last year U.S. coal shipments reached a record 114 million tons. Among the countries, China emerged to be the one of the prime coal importer.
With natural gas prices recovering from recent lows, the increasing coal-to-gas switch for power generation witnessed in 2012 will slow down. This will bring coal back to the energy game. Arch Coal will thereby benefit from improving coal fundamentals in the domestic market.
Further, its opportunities are starting to look up given the 300 gigawatt of coal-fired generation that is expected to come into service in the next 5 years worldwide.
The projected 3% surge in global steel market in 2013 as per the World Steel Association will also drive metallurgical coal production. The company has already booked a substantial 6.5 million tons of metallurgical coal for 2013 which will support its growth objectives.
We believe China’s appetite for coal will increase on account of its cost-competitive nature which will spur returns for Arch Coal with this new initiative.
However, other major coal exporting countries like Australia and Indonesia would continue to pose stiff competition owing to their locational advantages. In addition, pro-environment legislations undertaken by the current government and soft steel markets in Europe could limit Arch’s prospects.
At present Arch Coal retains a Zacks Rank #3 (Hold). Coal companies that are performing well as of now include Zacks Rank #2 (Buy) Alliance Holdings GP, L.P. (AHGP - Snapshot Report), Alliance Resource Partners LP (ARLP - Snapshot Report) and James River Coal Co. .
Based in St. Louis, MO, Arch Coal engages in the production and sale of steam and metallurgical coal from surface and underground mines located in the United States.