TORONTO (miningweekly.com) – Arch Coal, the second-biggest coal producer in the US, will hold off on committing more thermal coal sales beyond the current pricing year until it sees increased strength in the market, CEO Steve Leer said on Monday.

US domestic demand for steam coal was hard hit during the recession, pushing prices down and leaving utilities with big stockpiles by last year.

Demand has begun to return, and is expected to increase steadily over the course of this year, Leer told analysts and investors on a conference call.

Arch expects to sell between 147-million and 155-million tons of coal this year, most of which will be thermal coal, although the firm is pushing up its output of high-demand metallurgical, or steelmaking, coal, and and plans to shift coal that was previously planned as steam sales into more profitable metallurgical and pulverised coal injection markets.

Based on current production forecasts, Arch has between 65-million and 75-million tons of production still uncommitted for 2011, and 100-million to 110-million in 2012.

There are another 20-million tons each committed but not yet priced for both 2011 and 2012.

“We've spent a lot of time analysing the past three market cycles over the last ten years, and as we see it, there is a point in the cycle where layering in tons for future delivery makes a lot of sense,” Leer said.

“We are not at that point right now. We think we are in the beginning stages of the market cycle.

“But as we see a little more strength in the market, you will start to see us layering in tons.”

But the company is seeing increased interest from utilities for coal for delivery in 2011, 2012 and 2013, he commented.

“The high stockpiles that all of our customers almost, entered the year with, have come down substantially.”

Utilities are also starting to pay increased attention to declines in production in central Appalachia, which will benefit Arch's Powder River Basin operations, Leer said.

“The issues in central App are starting to take hold and get into the planning cycles of our utility customers.”

Arch Coal's management is presenting a more upbeat view of domestic steam coal prospects, analysts from Jefferies and Co noted on Monday.

“We believe supply cuts, capital expenditure discipline, metallurgical coal pricing momentum, and an eventual improvement in utility demand will improve coal industry fundamentals and support a share recovery,” they said in a note.

MET COAL

Arch, meanwhile, is working to increase its metallurgical coal sales, to take advantage of strong pricing and demand.

The firm is also shifting some coal from steam to metallurgical markets, where margins are significantly higher.

Arch said it now expects to sell between six-million and seven million tons of metallurgical and pulverised coal injection coal, compared with a January estimate of four to five-million tons.

It also has plans to increase production capacity to as much as eight-million tons a year of metallurgical coal if conditions warrant, Leer said.

INSPECTIONS

Leer said he expects the accident at rival Massey Energy's Upper Big Branch mine, in West Virginia, in which 29 miners were killed, will result in much closer and more aggressive scrutiny of the industry.

This will likely affect productivity, especially in the deeper underground mines he said.

“It's going to be additional monitoring for sure,” Leer commented.

“While mines might pass an inspection with flying colours, nevertheless, it does impact on productivity.

“If an inspector wants to look at a continuous miner, for whatever amount of time he wants to look at it, you pull it out of production and he inspects it.”

It is likely that regulatory efforts and changes will focus on the results of the investigation into the UBB disaster, particularly if the probe is able to identify the cause of the blast, he said.

Underground coal mines are likely facing a “wave of regulatory scrutiny”, Dahlman Rose analyst Daniel Scott wrote on Monday.

“Efforts by both Federal and West Virginia officials last week are aimed to immediately step-up inspections of underground operations beginning with mines with weaker safety records or a 'pattern of violations'.”

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