Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
Arch Coal (ACI)Stock (Manufacturing Industry, Industrial Metals & Minerals Industry, Coal Producers Industry, Energy Industry)
 Arch Coal is the second largest coal dealer in the U.S. The company is part of the Powder River Basin oligopoly, where it can mine high quality coal at a low cost. For this reason, it has the lowest production costs out of its competitors; in a cyclical market, this means that the company can keep its profit margins relatively high. Though Arch Coal stands to benefit greatly from a rising demand for low-cost energy sources, increasing environmental concerns are leading to government regulations that are putting pressure on the coal industry, making Arch Coal's long-term revenues uncertain. Within the industry, however, Arch Coal is well-positioned over the majority of its competitors.
[edit] Company OverviewArch Coal is the second-largest coal company in the U.S.; its coal is responsible for 6% of the electricity generated in the U.S., a large amount when considering that above 50% of U.S. electricity comes from Coal power. Arch Coal is not a utilities company; it sells its product to Electric utilities, factories, and other coal-burning business. These customers then burn the coal to fuel their generators and produce electricity. Once a mine is empty of resources, Arch Coal uses land reclamation techniques to prep it for resale, in order to maximize returns.
In the first quarter of 2008, Arch Coal reported revenues of $699.4 million, with operating income of $116.5 million. In the second quarter, EBITDA rose to $241 million. Per-ton pricing was up 14% in the first quarter, and 40% in the second for Central Appalachian coal. Powder River coal went for 55% premium on the second quarter's cost, in 2-year contracts.[1] [edit] CoalCoal is a highly cost-efficient source of energy - one of the cheapest in the world. When burned to produce electricity, coal-powered plants tend to have an average efficiency of 33% energy-to-electricity output; liquid forms of coal are even being touted as the next great way to power vehicles. A form of carbon, coal is a nonrenewable fossil fuel found in the Earth and is obtained using capital-heavy mining techniques; Arch Coal maintains mines in the Powder River Basin, the Appalachian Basin, the Western Bituminous, and more recently in the Illinois Basin. Coal is a commodity good; though different coal from different sources can have different mineral contents, there is no real product differentiation between competitors. This leads to competitive price cycles and, as a result, relatively low profit margins.
[edit] Powder River BasinOf all the mines in the U.S., the Powder River Basin is the most productive and the most abundant in coal resources. The geography of the basin facilitates mining in a way that eastern basins, like the Appalachian basin, do not; this allows coal extraction at much lower costs, though Arch Coal has seen margins drop in the region due to increased costs in the form of tire wear and diesel spending. The coal from the Powder River Basin is also low in sulfer, and is therefore attractive to electric utilities who want to meet environmental regulations for sulfer emissions. On the other hand, the coal is also high in water, which makes it less efficient to burn, and the basin is so far from Arch Coal's main markets that transportation costs are a major factor in constraining profitability. Nonetheless, the Powder River Basin is a highly lucrative part of Arch Coal's business, with coal prices in the region rising 50% in 2007[3]; because only five large companies control the whole basin (due to high establishment costs), there is little competitive pressure to mine out the region, meaning that the company has high future production potential in the area. [edit] Trends and ForcesDue to the commodity nature of coal, Arch Coal's profit margins are closely connected to the overall demand for coal. [edit] Commodity CyclesCoal is a commodity; there is very little that can distinguish Arch's coal from competitors' coal. Coal companies are price competitors; they attract customers by attempting to lower their prices below the competitions'. This makes it very difficult for companies to maintain high profit margins. When demand for coal is high, as could be caused by colder weather patterns or a rapidly expanding economy, prices rise for a period of time because of an undersupply to meet the demand; eventually, new companies enter the market to capitalize off of high prices and supply increases, lowering prices. Conversely, when prices are low for a period, due to high supply and low demand, companies leave the market, bringing down the supply and raising prices. While profits will be low during low points in the cycle, it is almost guaranteed that at some point, there will be an upswing and coal will be profitable again, at least for a while. Coal companies have no control over this cycle. As of the end of the first quarter of 2008, coal is on the upswing, with prices over $110 per metric ton in South Africa and $140 in Northern Europe.[4] [edit] InputsThe only way coal companies like Arch Coal can control their profitability is by keeping their costs down. This is also very difficult, however, because the majority of coal inputs are also commodities - steel, natural gas, diesel. As the prices of these products fluctuate, the cost of coal production fluctuates, making the profitability of coal a function of an output cycle and a number of input cycles. Thus, even if coal is in high demand with high prices, rising steel costs can crimp profit margins, if not revenues. [edit] Production ConstraintsProduction constraints can have a powerful, positive effect on coal price and, thus, Arch Coal's profitability. Limited transportation resources, like port space and rail capacity, can artificially limit the supply of coal may cutting down the amount that can be moved from one place to another, thereby pushing prices up. Further constraints, like labor or capital, can limit the amount of coal being produced at a mine, again limiting supply and pushing prices up. While this has the potential to limit coal companies' potential revenues, it also tends to make coal more profitable. Limits on labor, port, and rail capacity in foreign markets have contributed to the profit boom in the American coal industry, as well as to the rise in coal prices to above $100/ton. [edit] Increasing Worldwide Energy DemandThe world's economy is growing quickly, fueled by the extreme growth of hugely populated developing countries like India and China; the U.S. economy is also rapidly expanding. As economies grow, due to the proliferation of industrial technology and manufacturing jobs, there is an increasing need for energy. Coal is the most cost-efficient source of energy for the production of electricity in the world; currently, coal is abundantly found, cheaply harvested, and burns with a relatively high efficiency of 33% energy converted to electricity. Because of this, many developing countries have and may turn to coal as an economically viable source of energy to power their expansion; in 2007, coal exports out of the U.S. increased by 10 million tons. China, for instance, has seen huge increases in demand for natural resources, of which coal is a major one; over 80% of China's installed capacity is coal-powered, and the country's coal use is expected to triple that of the United States in 2008[5]. China was meeting its coal demand with domestic supplies, but it has been projected that the country will need to start importing in the near future, creating new income opportunities for Arch Coal. Similar trends are unfolding in other developing countries like India, though many are tempering the effects of coal power by installing other forms of electricity production, like wind. Global coal demand has risen 30% in the last five years, and Arch Coal predicted in its 1Q08 earnings call that 2008 coal exports from the U.S. would rise 20 million tons, to 80 million tons per year. Even Europe, a haven for renewable energy development, is touting clean coal technology, with 10 gigawatts of coal plants currently in development[6] .The overall trend of rising energy demand appears to bode well for coal because increasing demand means increasing prices, especially if Arch Coal's second-quarter 2008 prediction that demand will outstrip supply by 35 million tons in 2008 comes true.[7] [edit] Government RegulationBecause of the nature of coal power, as well as the nature of coal harvesting, government regulations could play a part in raising production costs and lowering Arch Coal's profit margins. One of the major regulatory hurdles for the company involves the difficulty of obtaining permits to mine; as coal mining has highly detrimental effects on the ecosystems around mine areas, as well as on the air and water quality for human developments in the vicinity of mine areas, government permits to mine are handed out on a case by case basis. A March 2007 court decision made it more difficult for the company to expand its Central Appalachian holdings, and since no new mining permits have been given out in the past nine months, the company faces increasing challenges to expanding operations. [edit] Environmental Degradation and RegulationCoal is one of the dirtiest forms of energy production. It's burning releases a number of pollutants that contribute to smog, acid rain, and higher instances of respiratory problems in the general populace. Furthermore, coal power releases greenhouse gases, which are causing the global warming induced global climate change. This hot-button environmental problem, aside from being a major election issue, will have massive economic, political, and social effects in the future. For this reason, many governments around the world are being pressured by their citizens to regulate greenhouse gas emissions. From mandatory emissions caps to Carbon trading markets to subsidies of alternative, clean, and Renewable energy sources, these legislative regulations are making coal a less attractive energy source by forcing companies to limit coal power production or by making coal expensive relative to other power sources. While coal producers like Arch Coal are attempting to regain public support by developing "clean coal" technologies to reduce pollution emissions, the fact that burning coal will always release greenhouse gases keeps clean coal from being an environmentally viable form of energy, at least until carbon sequestration techniques are perfected. Overall, this trend will either lead to lower demand and, therefore, lower prices for coal or higher costs - either ways, contributing to lower profit margins. [edit] Safety RegulationsMines are dangerous places to work; perils ranging from falling debris to accidental explosions to dust-induced respiratory illness. Unions and citizens movements are always working for better mining conditions, which means higher production costs; the U.S. location of Arch Coal's mines means that labor cannot be exported to less-regulated parts of the world. The recent Coal Mine Health and Safety Act of 2006 is an example of a government regulation that has the potential, by taking time and energy away from production, to raise costs and, therefore, lower profitability. [edit] Mine DivestureRecently, the company has been selling off more and more of its holdings, in an attempt to retain high-capacity, low-cost mines and acquire new, more profitable ones. Arch Coal sold the majority of its Appalachian holdings in 2005; in the process, it got rid of many of its liabilities, including future employee health-care and pensions. The shrinking supply of coal in the Appalachian mines has been leading to higher costs of extraction, making the region less and less profitable. Other companies, like Peabody Energy (BTU), got rid of their holdings in the region only recently, giving Arch Coal a head start to gain back its losses. All in all, divesting resources from the region should be a positive move because it would allow Arch Coal to divert resources to more profitable locations like the Powder River Basin. [edit] CompetitionAs a form of energy, coal faces most of its competition from natural gas, a cleaner burning source of power. If natural gas prices fall, the entire coal industry could face a drop in revenue as power consumers turn to the cheaper form of energy. Arch Coal faces increased competition during times of high coal demand, and decreased competition during times of low demand. Because of the company's size and well-established industry position, there is very little risk of its collapse during a period of low demand. Arch Coal's major competitors include Peabody, Massey Energy Company, CONSOL Energy (CNX), Rio Tinto PLC, and a number of Chinese entrants such as Yanzhou Coal Mining. To compete effectively, Arch Coal must control its costs; controlling prices is very difficult because product pricing is a function of the market.
Overall, Arch Coal has highly competitive pricing, though it sacrifices its margins to achieve it. Peabody maintains a high quantity sold, and, coupled with costs lower than most competitors and prices that are high enough to maintain margins but low enough to keep sales outstanding, it is easy to see how dominant the company is in the market. Massey and CONSOL pose little threat to the big two, though CONSOL stands to benefit overall from its natural gas production, as natural gas demand moves conversely with coal, allowing the company to benefit in some way from price shifts in either.
 Arch Coal2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
[edit] Notes
|
The Shelf
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Edit
History
Bookmark
