By Nick Cunningham, Oilprice.com:
The future for the coal industry is looking “increasingly bleak,” according to an investor’s note from Macquarie Research. The analysis firm also said that “a wave of bankruptcies” appear to be just over the horizon as coal mining companies deal with mounting debt and a shrinking market.
The coal markets have collapsed in spectacular fashion over the last few years due to a perfect storm of factors. U.S. coal producers first had to compete ferociously with shale gas in America’s electric power sector as fracking took off about a decade ago. That forced an array of coal plants to shut down as cheap gas washed over the country. Subsequently a regulatory crack down from the federal government – including forthcoming restrictions on greenhouse gases – further dimmed the growth prospects of coal.
But U.S. coal producers had the international market, and exports stepped up in concert with falling domestic consumption. Now the foreign buyers are shrinking as well. China, the one country that the coal industry could count on for ceaseless growth in coal consumption, actually burned 2.9 percent less coal in 2014 than it did the year before.
When China, which consumes about as much coal as the rest of the world combined, sees its level of coal burning stay flat or even fall, that raises red flags for the entire industry.
There are two other major factors contributing to the coal bust. First, a flood of new coal mines came online around the world in the last several years, creating a glut on the international market. Second, China has implemented protectionist measures to guard its domestic coal mining sector. As a result, it saw a 22 percent decline in coal imports at the end of 2014 from a year earlier. This has exacerbated the global glut. Still, even Chinese coal companies are struggling – an estimated 7 out of 10 are not profitable.
U.S. coal producers had predicted that the pain would be temporary and that coal markets would rebound. But that does not appear to be the case. U.S. domestic coal prices are at six-year lows, having declined to $45 per short ton this year, a nearly 20 percent drop off from 2014. Coal markets are also getting battered by the natural gas and oil bust and broader decline in commodity prices, as well as the strong dollar, which makes exports less competitive. U.S. coal production is at its lowest level since 1993 and may decline even further.
Macquarie Research downgraded its projection for coal prices by $5 per ton, and said that the only way to bring the market back into balance was for capacity to be shut in.
Even worse, investors are starting to abandon the industry. Peabody Energy, one of the larger coal producers, had to pay a 10 percent interest rate on its latest bond offering. Worse-off companies may struggle even to access financing, forcing them to close up shop. Arch Coal and Alpha Natural Resources, for example – once prominent and stable coal producers – have seen their share prices plummet into penny-stock territory. The clouds are darkening over U.S. coal.
In the face of such dim prospects, Robert Murray of Murray Energy is hoping to defy the odds. He agreed to pay $1.4 billion to take over rival Foresight Energy, an Illinois coal operator. The combined company will make Murray Energy the third largest coal producer in the United States. However, to finance the deal, Murray will have to take on new debt, a risky move in such a depressed climate.
As Macquarie Research noted, the industry is shrinking. High cost producers are going to be forced out of the market. Murray plans to consolidate and survive by cutting costs – which he has done by skirting labor and environmental standards for quite a long time. But unless coal prices rebound, and there is not a good reason to think they will, Murray Energy too may be in for a grim future. By Nick Cunningham, Oilprice.com
The US fracking boom started with natural gas. Now it’s destroying its investors. Read… Investors Crushed as US Natural Gas Drillers Blow Up
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The sooner coal is replaced with uranium, the better for everyone. Once EV’s get a little better we can do without oil as well. And, heat pumps are more energy efficient than gas or oil.
The fossil-fuel age will come to an end and the uranium age will start as surely as 2+2=4. Not fast enough to suit me, but it’s a certainty. Irrationality can only go on for so long. The country that will show the way is, unfortunately not the US, but China.
Couldn’t disagree more with your comment.
Fossil fuels are the foundation for modern society. They provide CHEAP energy inputs, not to mention massive petro-chemical feedstocks that make pretty much every product you use/own these days, from fertilizers to plastics to pharma and much, much more.
If you live in the “western” world, you are literally bathed in fossil fuels from birth to death. This isn’t just about transportation.
Regarding EVs, just take some numbers about the volume of cars on the road today and extrapolate that into batteries. Are they 500 POUNDS each? Who is going to make all these batteries with nasty chemicals and heavy elements. Does the market supply even EXIST?
And the future of nuclear is Thorium, not Uranium.
Must disagree on the importance of shale oil’s contribution for any long term future, unless of course, the future oil price is very high. Arthur Berman has been right all along about this unconventional oil play. Again, unless we have sustained triple digit prices for the long haul, shale oil production is unsustainable. Oil from shale is a cash intensive high dollar play any way you slice it.
You are right about the consolidation going on. There are those who will do their exploration by buying up oil and gas production that has already been discovered. Same thing happened in the late 80s – early 90s. Especially if the price stays in the $40 – $60 bbl range for an extended period of time.
OilPrice.com no longer approves comments. I have posted there four or six times in recent weeks and nothing is approved. I officially consider then “contrary indicators”. Anyway, I find syndicated posts and comment there (ZH and here for the most part). I appreciate the opportunity to comment, right or wrong, as I see fit. I do not like being edited as I prefer to be edited by a community (it is how I learn from poor or uninformed or misspoke opinions).
Very big moves are happening and all this “green/renewable energy”, including corn ethanol, wind, solar, and what not, is NOT economical. Coal is.
I have long argued that coal is in an intentional slump so that insiders can scoop up cheap energy at low prices. The “coal is dead” narrative in the public media is deafening.
Let me explain in terms of oil, but the same applies to coal. Crash the price, blow out the investors, and then have savvy folks come in and get the quality assets on the cheap.
This is happening right now in shale/frack plays. The little guys are going to get blown out, because they do not have deep pockets. But the big players do, they have the skills/experience to pick the sweet spots, and at WTI at current levels they are getting cheap prices on assets that will provide real, profitable cash flow in the future.
Frack oil will be a very important part of future US oil production but it is being consolidated by big players at this very moment at the expense of the wild catter types and small companies dependent on junk bonds for survival. It is a sort of game where you let the little guys do all the work, throw them under the bus, and then collect the coins from their pockets that are worth picking up.
This is how business works and this is not the first time this has happened.
More to the point, this commodity is ENERGY folks. Coal isn’t going anywhere! It is part of the essential mix of keeping the lights on for many, many people, both in the US and abroad. What has to happen to make those assets most profitable is BKing the liabilities, the environmental costs, the pensions, and so forth. Learn to shop the the entities that are shedding debts/liabilities, through BK, and hop on while they are still hated but without those obligations.
That said, I think we are heading for a highly deflationary mix and energy is going to do poorly for some time (opportunity), but for those with a long view and the pockets to play along, they can do well.
I agree fully with your assessment. I can just see a perfect storm brewing for the minors in Energy and Minerals down under.
“I have long argued that coal is in an intentional slump so that insiders can scoop up cheap energy at low prices. The “coal is dead” narrative in the public media is deafening.”
China is consuming around 50 % of world’s coal production, so slowdown in there can create a big mess in coal markets.
Is there any significant resource depletion or something similar which could support price of coal?
What? have we the annual meeting of the National Coal Manufacturers and Producers/Investors meeting here on this page?
I work for a hydro-based electric utility if that matters.
The thesis of the original article was incorrect, thus my comments.