Industry Insight

Date August 2015

By the numbers


Key statistics

  • Industry revenues: $34.8 billion (coal mining in U.S.)
  • Significant companies: Peabody Energy Corporation, Alpha Natural Resources, Arch Coal Inc., CONSOL Energy Inc.
  • Market share of top: The four largest companies in the U.S. coal mining industry account for an estimated 28.6% of industry revenue.
  • Recent sales trends: The U.S. produced 66,465.76 thousand short tons of coal in June 2015. That’s nearly 16% lower than the same period last year.
  • Market expansion/contraction issues: Significant merger and acquisition activity is present in the industry, as operators have attempted to acquire as much affordable metallurgical coal as possible.

Current trends

  • Alpha Natural Resources, the second largest producer of coal in the U.S., filed bankruptcy in August 2015
  • The secondary market for mining equipment is down

Production and consumption down; prices falling: The past few years have seen a global oversupply of coal, a major contributing element to the currently weak market conditions. As recently as early 2015, some outlooks continued to predict inevitable growth in global demand, but markets have not recovered. Difficult market conditions are likely to prevail in 2015.

Coal stocks are suffering. The fall in worldwide demand, and the consequent fall in prices, has been drastic in the last year. Metallurgical coal (also known as met or coking coal, processed to create coke for steel production), thermal coal (also known as steam coal, used in power plants) and coal byproducts all face steep challenges. Thermal coal prices, for example, fell nearly 60% since 2011 according to the Institute for Energy Economics and Financial Analysis (“IEEFA”). The fall is expected to continue, although met coal prices should fare a bit better than thermal coal prices, which are anticipated to decline 30% by 2020.

Coal markets depressed; closures and bankruptcies mounting: The combined market value of U.S. coal company shares shrank to about $12 billion in late July from $78 billion in 2011, according to Bloomberg data. Many of the world’s major mining companies are operating on a gross cash breakeven basis. Even the major miners saw losses in the last four quarters, including Peabody Energy, the world’s largest private-sector coal company. Its stock prices were beaten down this year. From the IEEFA: “Five years ago Peabody Energy’s equity capitalization was USD$18 billion. . . . [It has] seen its share price decline 95% since, against a U.S. equity market up 80%.”

Consequently, bankruptcies have been mounting. In the past two years, Walter Energy Inc., James River Coal Co., Patriot Coal Corp. and many smaller firms have filed. The most recent is Alpha Natural Resources, the second-largest U.S. coal producer, which voluntarily filed for Chapter 11 restructuring on August 3, 2015. Alpha idled or closed 80+ mines and had fired 6,500 workers since 2011, idled approximately 35 million tons of production within three years and then cut capital expenditures by 55% in 2015. Although Alpha plans continued operation of its 60 remaining mines, its shares now trade at four cents. Compare this to Cleveland-Cliffs’ 2008 offer to buy Alpha at $128 a share.

Natural gas emerging as a major competitor: Natural gas rose as a real competitor in recent years: cheap, abundant and relatively easy to integrate as a replacement for coal in the electric power industry. Natural gas prices plummeted 80% in the last seven years thanks to the shale gas boom. In addition to prices, natural gas plants enjoy a “cleaner” reputation and are more nimble in the face of fluctuating demand. That is, while coal plants are more reliable for base-load power, natural gas plants are much quicker to start when power demand spikes. Thus, the use of natural gas in energy production grew significantly across the U.S. in recent years. The U.S. Energy Information Administration reports that in April 2015, electricity generation from natural gas exceeded that from coal for the first time on record. Natural gas supply and pricing will continue to be one of the most notable outside influences on the coal market.

Environmental regulation pushing the world away from coal: Electricity producers and industrial facilities face increasing regulation of greenhouse gas emissions and other pollution controls. In the U.S., regulations have increased for decades; in August 2015, the Obama administration released its Clean Power Plan, which reduces coal’s share of power generation to 27% by 2030, lower than its percentage in the 1950s. Environmental concerns are growing across the globe, even in nations that previously had few pollution controls. Upcoming regulations will cut into profitability in the sector, and coupled with increasing competition from other power sources, will make the construction of new coal plants less likely in many areas.

China’s role in the global coal market remains significant: China is the best barometer of coal’s future as it has long been the largest producer, consumer and importer of the commodity. For many years, coal industry outlooks celebrated China as an insatiable source of demand. Then, in 2014, its coal consumption fell 2.9% – a globally significant drop since China burns as much or more coal than the rest of the world combined. Consumption for year-to-date July 2015 is estimated to be down 8% year-over-year, a continuing decline that bodes ill for global coal markets. In response to the consumption drop, China took measures to guard its domestic mines. As a result, coal imports dropped 9% over 2013-2014, with thermal coal imports down 11%. This exacerbated the global glut in the market. The first six months of 2015 saw a precipitous 38% drop in China’s coal imports. Overall, this was the first decline in China’s coal market in 15 years. Many analysts now agree China has reached peak coal sooner than expected. These conditions will have a staggering effect on the outlook for seaborne thermal coal, with global implications for demand and pricing.

Few bright spots among the negatives: In many experts’ view, large markets like Western Europe, Japan and China have already passed peak demand. Still, despite pressures from natural gas and renewables in the electricity markets, coal will be a source of reliable base-load power for many years to come and remains indispensable in the steel industry. A bright spot in the outlook is India, now expected to surpass China as the world’s largest importer of coal for 2015. India’s coal imports are forecast to have risen 18% in 2014-15. Demand is still rising as India’s consumption of coal outpaces domestic production; to meet the nation’s growth plans, imports of both thermal and met coal will be needed. Some warn, however, that it is unclear how long this will last.