"While we are seeing signs that the fundamentals for US coal markets are improving, coal demand and pricing remained depressed during the third quarter," said Steven F. Leer, Arch Coal's president and chief executive officer.

"As a result, Arch continued to curtail production at several key operations while maintaining its focus on cost controls. Meanwhile, solid performances at most of our mines - including a strong performance at Black Thunder and substantially improved results at Samples - had a positive impact on our quarterly results."

Since the second half of 2001, the US coal market has been dominated by very weak economic activity. Mild winter weather dampened coal demand and pricing, driving utility stockpiles to abnormally high levels. Despite a hot summer that reduced those stockpiles markedly, many power generators have remained on the sidelines during the initial stages of the traditional contract buying season, Arch said.

"We are taking a very patient approach to this market," Leer said. "While we can't say exactly when coal markets will turn, current trends suggest that a correction may be near."

The principal question appears to be one of timing, according to Leer. "Nationwide, coal production is down more than 3% year to date, according to the U.S. Energy Information Administration, while electricity demand appears to be climbing once again," he said. "If those trends continue, the market is almost certain to tighten."

Nearly all of the production cuts have come in the eastern United States, where producers continue to face a range of challenges, including difficulties in obtaining new mining permits, limited access to capital, lack of surety bonding capacity, higher insurance premiums, and ongoing degradation of the highest quality reserves in the region.

"These challenges have led to the rationalization of supply in the east," Leer said. "Some of the high-cost production that has exited the marketplace is unlikely to return even in an improving price environment. In fact, many of the weaker and more capital-constrained producers will find it difficult to maintain production even at current levels."

Production in Central Appalachia, the nation's second largest coal-producing basin, is likely to decline by as much as 15 million tons this year, and further reductions appear likely in the future, Leer said.

Another positive impetus for improving market conditions is the high price of natural gas. The near-month futures contract for gas is currently trading at levels well above $US4 per million Btu's, which means that coal-fired power plants will dispatch electricity to the grid before gas-fired power plants in nearly every instance.

Arch's estimates suggest that stockpile levels at the end of September were very much in line with levels at the same point in the year during 1999, 2000 and 2001.

"It is possible - and entirely understandable, given today's difficult power markets -that power producers are planning to operate with stockpiles at levels lower than the historical range," Leer said. "If that is the case, the long run impact is likely to be a positive one for coal producers, as the market moves towards better overall supply-demand balance."

Arch will continue to produce at reduced levels until the market strengthens.

"We will bring back volumes when the market needs the coal, and not before," Leer said. As a result, Arch expects earnings in the fourth quarter to be around breakeven levels.

"We continue to believe that the intermediate and long-term prospects for the strongest players in the U.S. coal sector are bright, and we remain focused on taking the steps necessary to deliver superior returns to our shareholders," Leer said.

In other developments, Arch's 65%-owned Canyon Fuel Company completed the installation of a new longwall mining system at Dugout Canyon in September. This is expected to increase annual production levels at the mine by approximately 2.5 million tons, to approximately 4 million tons per year. The project had been delayed until planned volume additions could be fully contracted.

"Given the insulated nature of the Utah marketplace and reserve depletion at several competitor operations, we believe the Dugout expansion is a wise and market-driven use of capital," Leer said.