The US coal industry as currently structured is unsustainable.” Such was the damning judgement, not of any environmental group or politician, but of Kevin Crutchfield – the Chairman and CEO of one of the largest (and now bankrupt) coal producers in the US, Alpha Natural Resources (ANR). It is a remarkable fall from grace for an industry that until recently generated over half of US electricity. Where did it go wrong?
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Crutchfield suggests five causes behind the financial crunch that has seen Patriot Coal (twice), Walter Energy, Edison Mission Energy and James River Coal enter bankruptcy along with ANR, and Peabody Energy announce a billion dollar loss in 2Q15. It’s a familiar list.
- Falling demand and pricing on the back of increasing regulation.
- Cheap and abundant gas.
- A plethora of legacy retirement, pension and restoration costs.
- Substantial environmental and restoration obligations.
- Reclamation bonding demands that constrain available liquidity.
Missing from that list, which was included in Crutchfield’s declaration to the bankruptcy court as part of ANR’s bankruptcy filing, was the debt burden taken on by many US coal operators to fund acquisitions during the halcyon days of 2011 when prices for metallurgical coal hovered between US$250 and US$300 per tonne and thermal coal was similarly buoyant at well over US$100 per tonne.
These were heady days for the mining industry as a whole – days for which the industry has paid heavily over the past few years. And it was no exception for the US coal industry: between them, the top three producers spent US$17.1 billion on acquisitions in 2011.
This added debt has left companies far more vulnerable to the subsequent black swan events that have crippled the industry: the shale gas boom; a hugely increased regulatory burden; and the economic realignment in China that has seen its demand for all commodities fall away just as major producers have ramped up production. And it means that more pain may well be on the way.
“There are a number of highly-leveraged companies […] that remain vulnerable to restructuring,” Anna Zubets-Anderson, VP Senior Analyst at Moody’s told me recently, before presciently naming ANR as one example, as well as Arch Coal.
So where are the bright spots? As we point out in our Coal News this month, different coal basins will be impacted differently, with the Illinois Basin best positioned, according to Zubets-Anderson, while smaller, nimbler producers are likely to fare better than the heavy hitters. But the most positive outlook comes from taking the global view – as World Coal does. Take, for example, Vietnam. The US Energy Information Administration reckons that the use of coal will grow substantially there to 2030 as the country moves from a primarily agrarian to an industrial economy.
Indeed, barring some Parisian miracle at the UN climate talks later this year, coal will remain the bedrock of global power demand – and an essential ingredient in the steelmaking process – for the foreseeable future. And if the past five years has taught us anything, it is that the energy landscape can change unpredictably, dramatically and remarkably quickly. In a world of high geopolitical and economic uncertainty, who is to say that the next five years won’t see coal – with its security of supply, low costs and abundance – back in favour.