King Coal Is Losing His Throne
Peabody Energy joins a growing list of coal miners who are going broke thanks to a perfect storm of cheap natural gas, the slowdown in China, and tougher environmental rules.
Peabody Energy, the world’s biggest privately owned coal mining company, filed for bankruptcy protection in the United States on Wednesday. The company becomes the latest casualty of a coal-market bloodbath that has already pushed other big U.S. miners into insolvency in recent months.
Peabody said in its bankruptcy filing that the challenges facing the coal sector are “unprecedented” and include a slowdown in China, cheap natural gas, and new environmental regulations. The company hopes to use bankruptcy protection to shed debt and improve cash flow, and will keep all mines operating in the meantime. Peabody President and CEO Glenn Kellow called bankruptcy “the right path forward” in order to “lay the foundation for long-term stability and success in the future.”
In the United States, coal companies’ fortunes have gone south dramatically, and in a hurry. The big four producers — Peabody, Arch Coal, Alpha Natural Resources, and Cloud Peak Energy — were worth a combined $34 billion in 2011, according to the Rhodium Group, a consultancy. Today, they are worth about $185 million.
Coal’s challenges seem more fundamental than the cyclical headwinds that periodically hammer U.S. commodities producers. Cheap and abundant natural gas has pushed coal out of its dominant perch in the U.S. power sector. At the same time, the Obama administration has sought to slap coal with tough new environmental regulations. Neither headwind for coal looks set to disappear anytime soon.
“Without a doubt, this is a structural shift,” said Kelly Mitchell, energy campaign director for Greenpeace USA, the environmental group. Rather than tallying up all the challenges the coal sector faces, she said, “it’s easier to try to determine what’s gone right for them. And the answer is, essentially nothing.”
Globally, the outlook for coal is a little different. Natural gas isn’t yet quite as cheap or abundant in many other markets as it is in the United States, leaving more room for coal, especially in Asia.
“The U.S. has a fundamental difference in market conditions, but internationally, I do not think there is a fundamental barrier to a recovery in coal prices,” said Jim Thompson, head of Americas coal research at consultancy IHS Cera.
There are a couple of big question marks. China’s seemingly insatiable appetite for coal, both the kind used to fuel power plants and the kind used to stoke steel furnaces, seems to have hit a wall. Chinese authorities are seeking to cap national coal consumption and limit the construction of new coal-fired power plants to come to grips with deadly, and politically toxic, air pollution.
Other Asian countries, especially India, could burn a lot more coal in the future as they seek to bring electricity to hundreds of millions of people. But even in India, ambitious plans for clean energy like solar power could cloud coal’s future. And India, like China, Japan, and South Korea, also could import large volumes of natural gas to run power plants in years to come. Seaborne trade in natural gas hit a record high last year, making it easier for countries in Europe and Asia to start finding affordable alternatives to coal.
For big miners, including Peabody and Arch Coal, the billion-dollar question hinges on the future market for high-quality, high-priced metallurgical coal, the kind used in steelmaking. Met coal provides most of miners’ profits; part of Peabody’s woes stem from debt it took on to buy an Australian metallurgical coal producer for about $5 billion in 2011.
But Chinese demand for steel is falling as the Chinese economy slows down. Coupled with Beijing’s deliberate shift away from heavy industry and more toward services, that has dampened the market for lucrative met coal. U.S. met coal exports to China dropped by more than 80 percent last year, and exports fell by almost 25 percent overall. The Rhodium Group earlier this year pegged China’s dismal met coal market as the real reason coal companies are struggling.
Yet met coal might be the one light at the end of the tunnel for beleaguered producers like Peabody. Global steel demand is in the doldrums, but could recover if the global economy gets back on track. On Wednesday, the World Steel Association said demand could recover as soon as 2017, which would mean more appetite for coal companies’ premium product.
“To say that the met coal market can’t rebound is far too pessimistic,” Thompson said.
Photo credit: PEABODY ENERGY