Published: March 10, 2016 |

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Metallurgical (met) coal prices will likely remain weak over the near term, increasing only gradually in the coming years as market oversupply recedes, according to Fitch Ratings.

Met coal prices have continued to fall in early 2016 with benchmark hard coking coal contracts settling at $81/tonne for the first quarter. This represents an over 30 percent decline from the $117/tonne price negotiated for the first quarter of 2015 and a drop of more than 75 percent from the peak at $330/tonne in mid-2011. Indications for the second quarter of 2016 are roughly flat and Fitch expects the year to average $85/tonne, down from the average of $102/tonne in 2015.

North American supply has been rationalized owing to a string of coal company bankruptcies, but continued production out of Australia is likely to offset these cuts and prevent any meaningful reduction to global supply in the short term.

Fitch expects Chinese coal demand to remain weak for the next several years and forecasts that any increases in Chinese import demand will be met by Australian supply due in part to the cost advantages Australian producers enjoy as a result of the strong US dollar. Australian producers will also be advantaged by a June 2015 agreement exempting them from a tariff imposed by the Chinese government on met coal imports.

Since mid-2015, top US met coal producers Alpha Natural Resources, Walter Energy and Arch Coal have all filed for bankruptcy protection. All three companies engaged in leveraging transactions near the height of the met coal boom in 2011 that proved unsustainable when prices continued to fall. Peabody Energy is also considering restructuring alternatives as it attempts to preserve its liquidity in the midst of market turmoil.

However, the current malaise is providing buyers with an opportunity to pick up met coal assets at distressed valuations. In February, CONSOL Energy sold its met coal mine in Virginia for a total price of $420 million including the assumption of certain liabilities. Fitch projects that similar agreements for other high-quality met assets will be announced in the coming months as the industry restructures.

About Fitch
Fitch Group is a global leader in financial information services with operations in more than 30 countries. Fitch Group is comprised of: Fitch Ratings, a global leader in credit ratings and research; Fitch Solutions, a leading provider of credit market data, analytical tools and risk services; BMI Research, an independent provider of country risk and industry analysis specializing in emerging and frontier markets; and Fitch Learning, a preeminent training and professional development firm. With dual headquarters in London and New York, Fitch Group is majority owned by Hearst.

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