The Strategist

US Coal Industry is Dying

07/23/2015 - 17:14

Coal industry of America has entered into uncharted territory. After decades of non-financial indicators and dominance in the electricity sector, coal mining companies are on the verge of collapse.

US Coal Industry
US Coal Industry
And it happened faster than anyone could have expected.

The second quarter clearly showed that the deterioration of financial performance is going too fast, particularly, it deteriorated in the last few weeks.

Walter Energy, mining company from Alabama, announced on July 15 bankruptcy proceedings. If they do not resolve the problem, they would have to sell almost all of the assets to satisfy creditors' claims.

Director General Walt Scheller in a press release said that the company was faced with depressive conditions, and the industry needs to adapt to the new reality.

Alpha Natural Resources, the largest producer of coking coal in the United States, which is used for steel production, announced the delisting on the New York Stock Exchange, as the stock fell to abnormally low levels. The company is considering bankruptcy as a protective measure.

Arch Coal is also faced with the possibility of delisting, but decided to go for a reverse stock split at a ratio of one to ten to even stay on the market. In theory, this should increase the value of shares, a reverse split will occur on July 27, but the dynamics of securities still will not change much.

For four years, coal prices have fallen by about 70%. The United States is gradually shifting towards gas in electricity production and weak demand for coal leads to the closure of mines.

Obama’s administration is also trying to reduce greenhouse gas emissions, and coal is a major factor of these emissions. It is the dirtiest source of energy, and sector's future remains very uncertain in the fight for the environment.

The situation will only get worse as it is planned to reduce carbon emissions at the power plants of the country to the desired value before the end of the Obama presidency.

But there are other factors that increase the burden on the coal companies. For example, the Department of Home Affairs this month proposed a new rule under which companies must create and monitor buffer zones around mines. They will also be obliged to monitor water quality before, during and after production.

The reaction was quite predictable: the environmentalists talk about lack of control, and the coal miners declare unnecessary draconian rules.

The combination of weak demand and rising costs results in excessive pressure on the sector. Now America's coal industry has faced permanent structural decline.

The sector was damaged too quickly. The aggregate market value of all US public companies is less than $ 9.3 billion. 40% of this amount accounts for one company, Consol Energy.

The capitalization of the coal industry in April 2011 decreased by more than 80%.

The only way out is to export coal abroad, but even China, the biggest consumer, is now importing less.

Oversupply in the market, low prices and the struggle for the reduction of emissions - all of this negates any attempt to rectify the situation. At the end of the fiscal year in June 2015, China reduced imports by 31%.
2015 is horrible for the coal industry, but in the future, it will continue to get worse.