Coal Industry Fundamentals

There are two types of coal: thermal and metallurgical. Thermal coal is used to produce energy, and it is lower in carbon content and heating value. Metallurgical coal is less abundant. It is used in the production of coke which is then used in steelmaking.

Demand for thermal coal has been falling because of aging coal-fired power plant retirements, new environmental regulation on coal power generation, and natural gas and other electricity technologies becoming cheaper, especially because of low natural gas prices.

As a result of these factors approximately 30GW of coal fired capacity is expected to be retired between 2013 and 2022. On the plus side, coal is taking market share from oil in some developing countries, and there are supposedly over 1k coal plants with >1TW of capacity currently in the planning stage.

The demand for metallurgical coal is a function of steel production. The two key ingredients are iron ore and coke. Coke is the fuel used to melt the iron ore. The coke is made by heating the met coal in the absence of oxygen in a coke oven, which prevents the coal from burning.

Australian met coal producers have an advantage over U.S. ones due to a freight and quality advantage, so U.S. met coal producers have a better shot at domestic use and at selling to European consumers. U.S. producers are marginal producers, particularly susceptible to decreases in demand because they have higher freight costs and lower quality coal.

Flooding in Australia in 2010-2011 caused a met coal supply shock, pushing up the prices of iron ore, steel, and especially met coal. At the same time that this supply shock abated, the frenzy of construction in China and therefore demand for steel has started to slow.
 
The Chinese are building more met coal mines, and improving rail connection between China and Mongolia would allow Mongolia to be a more significant met coal supplier to China.

Many of the U.S. coal producers have too much leverage from making acquisitions at the top of the market. Look for more restructurings after JRCC.