Massey looking to export more coal on steel growth

By Steve James

NEW YORK, Oct 26 (Reuters) - Coal producer Massey Energy Co (MEE.N) said on Friday it was spending $480 million to expand its Central Appalachian mines so it can export more and take advantage of increasing demand from the global steel industry.

The two-year plan to produce about 8 million more tons of coal would also position Massey as the dominant low-cost producer in the declining coalfields of Virginia, Kentucky and West Virginia, Chairman and Chief Executive Don Blankenship said.

Right now, he said, U.S. coal producers could benefit from a "perfect storm" to export more because of a weak U.S. dollar, high shipping rates and Asia taking much of the available coal from Australia, the world's largest exporter.

Steel-making, which needs metallurgical, or coking coal, was growing, especially in China and emerging economies.

"Steam coal has been uncertain for a while, but met markets are strong and there is increasing steel demand," Blankenship told Wall Street analysts during a discussion of Massey's third-quarter financial results.

"Supply issues and the weaker dollar are making U.S. met very attractive," he said on a conference call. "That's why we are increasing our production over the next two years by 8 million tons." Massey produces about 40 million tons per year.

The expansion in Central Appalachia will cost $40 million this year and $220 million in each of 2008 and 2009 and Richmond, Virginia-based Massey will fund it with existing liquidity and cash flow, he said.

The budget is in addition to $240 million per year of capital expenditure for maintenance and other reasons.

On Thursday, Massey said although third-quarter net income fell from the year ago, the 2006 figure included a large gain. In fact, coal revenue rose 13 percent, with significantly higher sales of metallurgical and industrial coal, it said.

Massey projected 2008 coal shipments topping 2007 levels, with higher prices and forecast shipments increasing in both 2009 and 2010. New metallurgical coal business is expected to close at prices more than $10 per ton higher than a year ago.

On Friday's call, Blankenship said that in contrast to previous bullish coal markets, "the big difference now is the weakness of the dollar.

"Also vessel freight rates are high and there is a shortage of vessels and (high) diesel prices."

Meanwhile, Australia had 40 million to 42 million tons it is more likely to export shorter distances to Asian markets.

"Given the costs, it does not make sense for Australian coal to be so prevalent on the Atlantic market. So we believe a large portion of our coal will be exported," he said.

In past decades, when steel was in decline, coal producers felt the pinch. "There was closing down of steel mills and downward pressure. We went through 10 years of that.