U.S. Coal Producers Facing Unprecedented Times

 

While oil is grabbing all the headlines lately, another fuel used to generate heat and light has tumbled even more than the black gold.

Global thermal coal prices have tumbled 52% since 2011 alone. And the rout shows no signs of abating with global seaborne thermal prices hitting $62 per metric ton (mt) recently.

The reason behind coal’s fall is the same as oil’s – the shale revolution led to a surplus of thermal coal globally, just as demand from China and India started weakening.

And like oil, producers around the world are ramping up production, even as prices fall for the fifth year in a row!

The strategy is similar to OPEC’s – the lowest-cost coal producers around the world are trying to drive the higher-cost producers out of business.

Black Cloud Engulfing U.S. Coal

Also as with oil, some of the thermal coal producers in the most trouble are right here in the United States. Thermal or steam coal accounts for over 90% of all domestic coal output.

The CEO of Alpha Natural Resources (ANR), Kevin Crutchfield, said the conditions facing the U.S. industry are “unprecedented.”

In a similar vein, Greg Boyce, CEO of Peabody Energy (BTU), the largest U.S. coal producer, said conditions were “challenging.”

And these executives are not exaggerating…

U.S. thermal coal prices are at six-year lows, and Appalachian coal recently hit $45.75 per ton, down from more than $56 a ton a year ago. That isn’t far from the $42.20 per ton price hit in the depths of the financial crisis in April 2009.

The downturn in domestic demand for coal has been accelerated by the 44% drop in natural gas prices since June. This pushed many utilities, looking to save money, to switch from coal.

Exports, which have been a strength the past few years, are also being affected by the aforementioned global glut in thermal coal.

Plus, U.S. coal producers are being socked from an unexpected direction too. You see, financial pressure on Russia is forcing the value of the ruble done, which has turned Russia into a competitive low-cost coal producer.

These unprecedented conditions can be clearly seen in the price actions of the U.S. coal company stocks.

Collapsing Under the Weight

In the past five years, Peabody has lost 87% of its value, Alpha 98%, and Arch Coal (ACI) 96%. And in the last six months, Peabody is down 59%, while both Alpha and Arch are both down 69%.

The stocks have plunged because the financials aren’t pretty.

For example, Peabody recently reported an after-tax loss of $787 million for 2014 and slashed its quarterly dividend by 97% to $0.0025 a share. And its operating cash flow of $337 million was less than its interest payment of $414 million, according to the Financial Times.

Yes, the future for U.S. coal companies looks bleak as conditions continue to worsen, including regulatory pressure from the Obama administration.

Unfortunately, exports will not be a salvation.

China seems to be serious about cutting pollution coming from coal plants. In fact, many industry observers think we may soon reach peak coal demand in China. Imports of foreign coal into China fell by 11% last year to 292 million mt, says Bloomberg. And Chinese consumption of seaborne coal is expected to fall another 9% to 195 million mt this year.

So what is the likely end result for U.S. coal producers?

As Nomura analyst Curt Woodworth told the Financial Times, “I think you’re going to see multiple bankruptcies in U.S. coal over the next 12 to 18 months.”

However, that does not mean all U.S. coal firms are headed for the dust bin of history.

Peabody has seen some insider buying, and it has more higher-quality assets around the globe, including in Australia, than its peers. So at least it looks to be a survivor.

And the chase continues,

Tim Maverick

Tim Maverick boasts decades of experience in the investment world. He spent 20 years at a major brokerage firm - as a trading supervisor and broker working directly with clients.  Learn More >>