TORONTO (miningweekly.com) – There are encouraging signs that metallurgical coal demand in most key global markets is either returning or poised to do so, Alpha Natural Resources CEO Kevin Crutchfield said on Thursday.

Further, while inventories of US thermal coal remain high by historical standards, this situation could turn around over the next 12 months, to the point where demand exceeds supply – possibly in late 2010 or early 2011, he told analysts and investors on a conference call.

Alpha Natural, now the third-biggest coal producer in the US after it bought rival Foundation Coal last month, produces steam coal from mines in the Powder River Basin (PRB) and in north and central Appalachia.

It is also the biggest producer of high-quality metallurgical coal from its Appalachian mines.

Based on committed and priced coal shipments, the company expects to receive an average of $10,50/t for its PRB coal this year, but that average prices will improve to $11,17/t in 2010.

Eastern steam coal prices are forecast at $63,84/t in 2009, but are seen increasing to $69,51/t next year, while Alpha Natural estimates it will realise an average of $114,45/t for its metallurgical coal in 2010, up from a forecast $100,87/t for this year.

Total shipments in 2009 are expected to be between 83-million and 87,5-million tons, and shipments are forecast at $80-million to $90-million next year.

This year's guidance includes 50-million to 51,5-million tons of PRB coal, 26-million to 28-million of eastern steam coal and seven-million to eight-million tons of metallurgical coal.

The firm is already “very well” contracted for 2010, with more than 85% of expected shipments committed for delivery, Crutchfield reported.

Although the economic downturn continues to weigh on coal markets in the US and around the world, the domestic metallurgical coal market, is starting to show signs of recovery, and will likely be the first segment of the coal industry to return to relative health, he said.

Further, the global fundamentals for metallurgical coal are also improving, with Chinese demand expected to remain strong, he said.

China, which was a net exporter of coal just three years ago, is on track to import about 100-million tons of coal this year, 30-million of which is expected to be metallurgical coal, Crutchfield said.

“This trend had been abating somewhat, but it is our belief the recent mine disaster is likely to sustain import requirements, given the closure of 157 small mines in the region.”

There are also “tangible” signs of increased metallurgical coal demand and requirements from Europe, which appears to be poised for a turnaround, he said.

As for steam coal, however, inventories remain above normal across the US, and a mild summer combined with low natural gas prices have added to the demand-weakening effects of the economic downturn.

However, with the outlook in the US beginning to improve, Crutchfield said the decrease in electricity demand can be expected to moderate and give way to at least modest demand growth in early 2010.

Much of the elimination of high-cost production that occurred during the down turn will be difficult to bring back, he said, which means that a stronger market could result in demand for steam coal outstripping supply, once inventories return to normal levels.

This could develop in late 2010 or early 2011, he predicted.

MORE GROWTH TO COME

After closing the Foundation merger, Alpha Natural had total debt of $901-million and cash or cash equivalents of $497-million, plus a $650-million revolver.

Crutchfield indicated on Thursday the firm will continue to look at potential merger and acquisition opportunities.

“With our liquidity and scale, Alpha has a number of strategic options.

“Our financial position enables us to entertain additional M&A opportunities which can either be small bolt-on acquisitions, that complement our existing business, or transformational deals, like the merger with Foundation,” he said.

The firm has created a new position of chief strategy officer, who will have the responsibility of evaluating both acquisitive and organic opportunities.

Management is committed to the continued growth of the company, Crutchfield said, but added that it would not be “growth for growth's sake”.

“Future growth projects – be they through acquisition or organic development – will be undertaken prudently, with careful thought to strategic fit, valuation and manageability.”

“But one thing's for sure: we will continue to grow beyond the current merger,” he asserted.