The latest bankruptcy filing in the coal industry, by James River Coal Company, is unlikely to change the competitive landscape as the natural gas revolution continues, according to Fitch Ratings.
James River filed for bankruptcy this week as low coal prices continued to affect company margins. Metallurgical and steam coal supplies are in excess across the world while prices remain low. Coal producers have been running for cash with a focus on reducing costs that is expected to delay price recovery.
- The metallurgical market remains challenged by overcapacity, which has been slow to rationalise.
- The Atlantic Basin export market, which had been an outlet for Central Appalachian coal, has become well supplied by lower cost producers.
- While domestic steam coal prices are benefitting from the cold winter and declining inventories of natural gas and coal, natural gas prices are low enough to replace Central Appalachian coal.
Under Chapter 11 of the Bankruptcy Code, James River will have further relief from debt payments and could vacate some underwater supply contracts, however Fitch Ratings does not expect new coal to come to market.
In their analysis, Fitch Ratings observed: “Investors disenchantment with mining in general and coal in particular, which dropped valuations. There may be some interest in some of JRC's operations, which include 343 million t of reserves, but it is hard to see how these can be mined better or the coal marketed more profitably. The industry remains heavily regulated in terms of safety and environment.
“Fitch believes the metallurgical coal market will remain oversupplied for at least 12 months despite low prices, as producers seek volumes to cover debt service and take or pay transportation costs. Generally, the industry is not attracting new capital, which should result in more balanced markets longer term. We expect Atlantic Basin and Newcastle benchmark prices to stay below US$ 90/t on average through 2014 and for margins to be challenged.”
Adapted from press release by Katie Woodward
Read the article online at: https://www.worldcoal.com/coal/11042014/james_river_situation_unlikely_to_affect_market_716/