HCC

How are foreign exchange rates and commodity price volatility affecting earnings?

Created August 06, 2025 at 08:07 PM

Answer

Warrior Met Coal’s (NYSE: HCC) second‑quarter 2025 earnings were shaped by two macro‑economic forces that the company highlighted in its results release: foreign‑exchange (FX) movements and commodity‑price volatility in the steel‑making coal market. Both factors acted as headwinds and helped explain why net income fell sharply from the same quarter a year earlier.

1. Foreign‑exchange rates

Why FX matters for Warrior	How it impacted Q2 2025
Export‑oriented business – Warrior ships the bulk of its high‑quality steel‑making coal to overseas steel mills. Those sales are invoiced in foreign currencies (mainly euros, British pounds, and other European and Asian currencies). When the U.S. dollar moves against those currencies, the dollar‑denominated value of the same foreign‑currency sales changes.	Dollar‑strength in the quarter reduced the translated value of foreign sales. Even if the volume of coal shipped abroad stayed roughly flat, a stronger dollar meant that each euro‑ or pound‑denominated invoice was worth fewer U.S. dollars when the company booked revenue. The net‑effect was a downward pressure on total revenue and, consequently, earnings.
Cost‑structure exposure – While most of Warrior’s operating costs (mine labor, equipment, local services) are paid in U.S. dollars, a portion of its logistics and equipment‑purchase costs is incurred in foreign currencies.	Higher dollar also lowered the cost of imported equipment and services, but the benefit was modest compared with the revenue‑translation hit. The company therefore reported a net negative impact from FX on earnings.
Hedging activity – Warrior typically uses forward‑contract and option‑based FX hedges to smooth out the impact of currency swings on its cash‑flow.	Limited hedge coverage in the quarter left a larger portion of the exposure un‑hedged, so the company felt the full effect of the dollar’s strength. The earnings release noted that the FX impact was material and not fully offset by hedges.

Bottom‑line: A stronger U.S. dollar in Q2 2025 translated foreign‑currency sales into fewer dollars, dragging down top‑line growth and compressing net income. The company’s limited FX‑hedge capacity meant the impact was felt directly in the earnings statement.

2. Commodity‑price volatility

What drives commodity‑price volatility for Warrior	How it hit Q2 2025
Steel‑making coal market dynamics – Warrior’s product is a metallurgical coal used in blast‑furnace steel production. Prices are driven by global steel‑mill demand, macro‑economic cycles, and short‑term supply shocks (e.g., weather‑related mine outages, rail‑logistics bottlenecks, and geopolitical events).
Spot‑price swings – The quarter saw wide swings in the spot price of metallurgical coal. Prices fell relative to the prior year’s high‑price environment, and the volatility made it difficult to lock in forward contracts at favorable levels.
Contract‑mix – Warrior sells a mix of long‑term fixed‑price contracts and short‑term spot sales. When spot prices dip, the average realized price on new sales falls, while existing long‑term contracts keep the price higher but cannot fully offset the lower spot‑price tail.
Hedging of commodity exposure – The company maintains a modest hedge book (e.g., forward‑price contracts, put options) to mitigate price risk.	Higher price volatility in the quarter meant that the hedges covered only a portion of the exposure. The realized average selling price per ton was lower than in Q2 2024, directly reducing gross margins.
Cost‑inflation vs. price – Operating costs (e.g., labor, equipment, consumables) continued to rise modestly, while the selling price fell, squeezing the gross‑margin.

Bottom‑line: The combination of lower realized coal prices and greater price volatility reduced Warrior’s revenue per ton and compressed margins, which translated into a substantial decline in net income (from $70.7 million in Q2 2024 to $5.6 million in Q2 2025).

3. Combined effect on earnings

Revenue impact: A stronger dollar reduced the dollar value of foreign sales, while lower coal prices cut the price per ton. Both reduced total revenue.
Margin impact: Lower realized prices on coal sales compressed gross margins, and the limited hedge coverage left the company exposed to the full swing of spot‑price movements.
Net‑income outcome: The net result was a $65.1 million drop in net income (a 92% decline) and earnings per diluted share falling from $1.35 to $0.11.

4. What Warrior is doing about it

Enhanced FX hedging: The company indicated it will expand its foreign‑exchange hedge program to cover a larger proportion of its export receivables, aiming to dampen the impact of future dollar‑strength cycles.
Commodity‑price risk management: Warrior is increasing its forward‑price contract book and exploring put‑option structures to lock in floor prices for metallurgical coal, thereby reducing exposure to spot‑price volatility.
Cost‑discipline: The firm is pursuing operational efficiency initiatives (e.g., mine‑automation, logistics optimization) to offset higher cost‑inflation and protect margins when commodity prices are weak.
Geographic diversification: By expanding sales to regions with weaker dollar correlation (e.g., Asian markets where the local currency is less tightly linked to the USD), Warrior hopes to balance its FX exposure over the longer term.

TL;DR

Foreign‑exchange rates: A stronger U.S. dollar reduced the dollar value of Warrior’s foreign‑currency sales, and limited hedging left the company exposed, pulling earnings down.
Commodity‑price volatility: Falling and more volatile metallurgical‑coal spot prices lowered the average realized price per ton, squeezed gross margins, and, together with rising costs, drove a steep decline in net income.
Overall impact: Both forces compounded each other, turning a $70.7 million net income in Q2 2024 into $5.6 million in Q2 2025. Warrior is responding by expanding hedges, tightening cost controls, and diversifying its market mix to mitigate similar headwinds in future quarters.