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Interview with Jeremy Sussman, Head of US Equity Research

Jeremy talks to Coaltrans about the impact the new political environment has had on the industry in the USA and discusses the Seaborne market's new found stability.

Coaltrans Conferences (CC): 
Seaborne markets have had a strong year, with relatively high and stable prices compared to the past few years. How has this impacted the US industry?

Jeremy Sussman (JS): 
Thermal coal exports are likely to more than double from the US this year, and overall exports are likely to increase over 50%. Clearly, this has tightened US thermal coal supply, and pushed prices up, especially in the east. On the met coal side, increased international opportunities have allowed domestic met coal producers to generate strong returns, and have helped many public companies return cash to shareholders.

CC: Donald Trump’s campaign last year ran on a strong pro-coal platform. How much impact has the new political environment had on the industry, if any?

 Sentiment wise, president trump has made a big difference. When coupled with strong international markets, we’ve seen coal jobs added this year, and new mines opened, mainly on the coking coal side. In addition, US thermal producers should benefit from the removal (in some form) of the Clean Power Plan (CPP). With the CPP in place, we can't have a real coal vs. natgas economics discussion post mid 2020s because coal is essentially capped under the CPP. If this goes away under President Trump (as he has directed), we think thermal coal names could get a (EV/EBITDA) multiple bump from an investor standpoint. Given the regulatory overhang of the past decade, U.S. coal producers clearly view President Trump optimistically, and are generally pleased with his first year in office.

CC: How has the US industry developed more broadly, over the past year?

We’ve seen a combination of new public companies and restructurings of existing companies emerge throughout 2017. Clearly, this is a welcome development compared to 2014-16, which saw a number of companies enter into the bankruptcy process. The international thermal and met coal markets have tightened meaningfully in 2017, providing opportunities for US producers to enjoy both increased exports and pricing. We expect the optimism to generally persist in 2018.

CC: Whilst 2017 has been a good year for coal, many still see the industry ultimately as in long-term, structural decline. Do you think that this is the case? Where are the bright spots?

Yes, and no. Ultimately, we see US thermal coal declining a modest amount each year (generally), though we believe the decline will be gradual. At the same time, we see solid growth prospects for both thermal and met coal exports from the US. Furthermore, we see structural growth for global met coal demand. India is increasing its steel demand at high growth rates, and has very little of its own domestic met coal supply. Couple that with China’s mid-year (2017) closure of ~40 mtpa of induction furnaces, which were replaced by ~40 mtpa of blast furnaces (i.e. scrap as feedstock for steel mills was replaced by iron ore & coking coal for feedstock at ~40 mtpa of steel mills), and we see a bright future for met coal demand from the US.

CC: How do you see coal vs gas competition developing over the next few years? What impact could LNG exports have on the domestic market?

The reality is that while President Trump’s likely removal of the Clean Power Plan is a positive for the US coal industry, the biggest factor for domestic coal demand will always be natural gas prices, in our view. The good news is that the natural gas curve has hovered around the $3+/MMBtu range for most of this year, where NAPP, the PRB, and Illinois Basin coal can generally compete with natural gas. Furthermore, increased LNG exports have the potential to keep natural gas prices in the $3+/MMBtu range, as the curve persists. The bad news is that as long as gas stays below $3.50/MMBtu, we see coal demand declining gradually in the US, due to coal retirements.
CC: Finally, you’ll be joining us for Coaltrans USA in February next year. What are you most looking forward to hearing discussed?

JS: The people! The coal industry is resilient bunch, and I have been lucky enough to be a part of the industry since 2005. It will be great to hopefully hear some optimism for the industry in 2018 and beyond.

You can hear more from Jeremy at 18th Coaltrans USA on 1-2 February 2018.
This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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