(The Financial Times circulated the following article by Doug Cameron on February 8.)
HOUSTON — Arch Coal on Tuesday warned that the congestion affecting the US rail system is expected to continue through the first half of this year.
The second largest US coal producer has, like other commodity companies, seen shipments delayed by the combination of ageing infrastructure and labour shortages hurting US railroad operators.
The railroads have committed to hiring more staff and modernising systems, although recent evidence suggests the problem has persisted. Average US rail speeds were 20.9 mph in the last week of January, a 4.6 per cent decline from the same period in 2004.
Arch, whose concerns are shared by larger rival Peabody Energy, said its 2005 earnings guidance assumed the rail problems would persist through the first six months of 2005, with a “gradual” improvement thereafter.
“It is a day-to-day adventure,” said Steven Leer, Arch’s president and chief executive. He acknowledged rail performance had improved in February after a “bad” January of storms and mudslides. However, Mr Leer said Arch remained cautious about 2005: “We’ve seen improvements [before] and then they’ve fallen back.”
Tom White, at the Association of Regional Railroads, said: “At this point, the system seems fairly fluid [but] you’re going to find some regional variations.”
The rail disruption forced Arch to take a series of special charges in 2004 and comes at a time of surging demand for coal in the US. Coal already accounts for about half of US electricity generation, and high natural gas prices have encouraged utilities to switch supplies, particularly for low sulphur coal that meets stricter emissions regulations.
Arch said domestic demand continued to exceed supply, with stockpiles still below historical levels despite the mild US winter.
The company’s comments came as it reported a 10 per cent fall in net profits for the fourth quarter, despite higher realised coal prices. Earnings fell from $22.1m to $20m in the three months to December 31, with earnings per share slipping from 40 cents to 32 cents.
Arch shares have traded at a discount to its peers, partly because of its relatively small exposure to metallurgical coal used, for example, in steel production. The company said it had doubled metallurgical sales to 2.8m tonnes last year, and aimed to raise this to 5m tonnes in 2005.
The company also scrapped its policy of quarterly earnings’ guidance and, for the first time, gave a full-year estimate. It expects earnings before interest, taxes, depreciation and amortisation of $400m-$450m, and earnings per share of $1.50-$2.00, below the $2.20 consensus among analysts.