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Prices for metallurgical coal, a key input in steel production, jumped this week after a fatal explosion forced Massey Energy Co. (MEE) to shut a West Virginia mine, squeezing an already tight market for the commodity.
The Upper Big Branch mine disaster takes supply off the market at time of strong Asian demand for the higher quality coal and a rebound in steel production in the U.S., Brazil and Europe.
Massey was scheduled to ship 1.6 million tons of metallurgical coal from the Upper Big Branch mine this year, equal to about 3% of total U.S. production last year. The Richmond, Va., producer said Friday it will increase production at other mines, but doesn't expect to replace all of the lost production from Upper Big Branch this year. The company said it couldn't predict when the mine might reopen.
With production at the Massey mine down since late Monday, prices have risen sharply. A weekly U.S. index compiled by Energy Publishing Inc. showed spot prices for so-called high volatility metallurgical coal at the port in Hampton Roads, Va., a major coal shipping center, jumped 22% in the last week to $241.67 a metric ton. The Knoxville, Tenn.-based publisher tracks spot deals and surveys buyers and sellers to arrive at the indexed price.
"The outlook for [metallurgical] demand continues to be pretty strong. Prices have run pretty significantly in recent days," Calyon Securities analyst David Lipschitz said Friday.
The blast at the Massey mine Monday killed 25 workers, making the explosion the worst U.S. mining disaster in more than two decades. The disaster forced steelmakers into the spot market to secure additional tons amid concerns over near-term supplies.
Annual demand for metallurgical coal among U.S. steelmakers totals about 20 million tons, and U.S. coal producers traditionally export an additional 20 million to 40 million tons a year, said Gerard McCloskey, chairman of The McCloskey Group, a consultancy and news provider focused on the global coal industry.
McCloskey expects U.S. exports to reach 50 million tons this year amid strong global demand and weather-related supply disruptions in Australia, the world's largest coal exporter. Even before the Massey mine disaster, the market had tipped from "very tight to one where everyone can't make the steel they want to make," McCloskey said.
Indicative of the booming demand from steelmakers, U.S. producers of metallurgical coal have been taking the rare step this year of shipping coal to Asia, a trade route that previously hadn't been economical. In the meantime, mining giant BHP Billiton Ltd. (BHP.AU) managed to secure quarterly agreements with Japanese steel mills for a 55% price increase, showing the leverage that producers wield.
In the U.S., Lipschitz doesn't expect steelmakers to face shortages of metallurgical coal that will force them to cut production. Instead, the impacts will be centered on pricing, with the question becoming whether steelmakers can pass through the higher costs to their customers, or if their margins will be squeezed by the higher coal prices.
Representatives of the steel industry declined to comment on the impact of the higher coal prices.
-By Mark Peters, Dow Jones Newswires; 212-416-2457; [email protected]