Alpha Natural Needs to Get Hot Again in a Cold Coal Market

Tickers in this article: ANR RICE
NEW YORK (TheStreet) -- Some industries are hot. Coal is not.

Last year was a rough ride for coal producer Alpha Natural Resources , with the company's adjusted net loss jumping to $475 million last year compared to adjusted net loss of $207 million in 2012.

Coal was not hot, with sales declining 21% plus a decline of around 11% in average realized price per ton. ANR shares, trading around $4 now, are down nearly 39% for the year to date and 48% for the past 52 weeks.

Although thermal coal sales are expected to improve, the big question remains whether Alpha Natural can survive current market challenges.

Thermal coal demand in the U.S. is improving because of the rise in natural gas prices. In 2014 and 2015 the natural gas spot price is expected to remain around $4.17 per million British thermal units (MMBtu) and $4.11 MMBtu respectively, which was around $3.76 per MMBtu in 2013 and $2.77 per MMBtu in 2012.

However, its metallurgical (or met) coal business is expected to remain challenging due to the increase in supply, especially from Australia last year. In 2013, global met coal supply was around 8.5 million metric tons. Alpha Natural expects met coal supply will further increase by 10 million metric tons over 2013 this year. One positive aspect is that global met coal demand is also expected to increase by 3.3% year over year, which will balance the incremental supply to some extent.

As current metallurgical coal prices are low and global supply is increasing, Alpha Natural has reduced its own met coal production guidance for 2014 from 18 to 22 million tons to 16 to 20 million tons. On the other hand, the company has increased its thermal coal guidance by 2 million tons.

The change in guidance is mainly for the low quality met coals like PCI coal and semi-soft coal. These coal varieties are generally sold in the met coal market, but their spot price is currently lower than the thermal coal spot price. Hence, Alpha Natural will sell these products as a thermal coal to receive better prices, which will help it generate higher revenue.