By Olivia Kalb

December 12, 2018 - The shift of about 100 coal miners from Arch Coal's Coal Creek mine to their Black Thunder mine in the Powder River Basin is part of a larger trend of producers shifting their interest from lower heat content coal mines in the basin, a market source said Tuesday.

With "pretty big value differences" between Coal Creek and Black Thunder coal it's simply "more profitable for Arch to optimize resources and move their people and equipment to Black Thunder," the source said.

Approximately 100 of 154 miners at Coal Creek are expected to move to Black Thunder, based 15 miles away from the Coal Creek mine, the Wyoming-based Casper Star-Tribune reported Monday.

Coal Creek, the source noted, has a heat content even lower than 8,400 Btu/lb, instead averaging around 8,300 Btu/lb. Black Thunder, too, is not necessarily at 8,800 Btu/lb. It has a heat content closer to 8,950 Btu/lb, and its going higher.

The source noted a long term trend of producers steadily shifting their product to higher heat contents as the total demand for PRB coal has declined.

Despite a larger spread between the lower and higher heat content products, customers are not buying the lower heat content coal and for producers the lower heat content coal is simply less profitable with a smaller margin per ton.

A Growing Spread

While $2/st would be a reasonable spread between PRB 8,800 Btu/lb and PRB 8,400 Btu/lb coal prices, since the end of 2017 the spread has largely been above $3/st.

According to the source the increased spread "obviously hasn't come from increased PRB 8,800 Btu/lb coal, but from decreasing 8,400 Btu/lb."

S&P Global Platts assessed the PRB 8,400 Btu/lb market at $9.25/st on Tuesday, down 30 cents from the year-ago price.

"In general," the source said, "with a $2/st spread, if PRB 8,800 Btu/lb coal is only $12/st then PRB 8,400 Btu/lb is $10/st, and below $10/st is not a survivable price."

The source noted that the decrease in PRB 8,400 Btu/lb pricing coincided with the purchasing of the Wyoming Eagle Butte and Belle Ayre mines by Black Jewel, which acquired the mines from Contura in September 2017.

Both Eagle Butte and Belle Ayre, mines, which contain coal with lower heat contents in the Powder River Basin, have increased production under Black Jewel, added the source, yet market demand has remained flat for the lower heat coal.

The Belle Ayre mine produced nearly 5.4 million st in Q3, up 30.1% from Q2 and up 20.1% from the year-ago quarter. In addition, it was the highest level of production since Q3 2015 when the mine was operated by Alpha Coal West before Contura took over.

Production from Eagle Butte totaled almost 4.7 million st in Q3, up 26.5% from Q2 and up 3.4% from the year-ago quarter. It was also the highest level of quarterly production at the mine since Q4 2016 after Contura took over in 2016.

Without demand matching Black Jewel's increased production the price will be pushed down, and "will push Arch out of the market," the source said. Only then, with less lower heat content coal in the market, the price will rise back up.

According to the source the expected Coal Creek production decline is likely to be "mostly offset by an increase in production at Black Thunder."

Arch Coal could not be reached for comment Tuesday.