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 November 9, 2015 - 10:30 AM EST
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Fitch: US Coal Producers Restructuring for a Smaller Footprint

U.S. coal producers continue to restructure as challenges in the sector mount, according to Fitch Ratings. The trailing 12-month default rate for the industry was 27.7%, including Hidili Industry International Development Ltd., Alpha Natural Resources, Inc., Winsway Enterprises Holdings Ltd., Patriot Coal Corporation, and Walter Energy Inc.

The decline in U.S. steam coal consumption has been well telegraphed by very low natural gas prices. Hopes for growth tied to export markets have been dashed by growing excess supply and the strengthening dollar. The prospect of further reduction in coal burn to reduce carbon emissions is firmly on the table, and U.S. coal producers are undergoing a painful right sizing.

When natural gas prices in the U.S. last saw levels under $3 per million BTUs in 2012, nearly 70 million tons of U.S. production found a home overseas. Currently, seaborne steam coal markets are also rationalizing, given excess supply and lower import demand from the largest steam coal market, China. Both China and India have been reducing their demand for coal imports as they ramp up domestic supply. Competition from key coal-producing regions of Australia, South Africa, Colombia and Russia, where currencies have become weaker, has displaced U.S. exports. Seaborne steam coal market prices are off more than 50% from their peaks, and Fitch expects further declines while production is curtailed and inventories are sold. We also expect U.S. steam exports to fall below 25 million tons per year from 37 million tons in 2014.

Fitch believes coal consumption for electric power will be relatively flat in advance of the implementation of the Clean Power Plan (CPP). We expect the shift from Central Appalachian Basin (CAP) production toward Illinois Basin (IB) and Powder River Basin (PRB) coal to continue, given cost advantages.

Thermal coal has been in a secular decline in the U.S. since 2005 and in the high-cost CAP since the late 1990s. Since the 1980s, domestic coal has had periods of consolidation, and several CAP coal producers filed for bankruptcy in the late 1990s through early 2000s. Lower for longer natural gas prices have cut domestic steam coal demand by about 100 million tons in 2015 from about 848 million tons in 2014 and allowed the adoption of the EPA's Mercury and Air Toxics Standards without consumer complaint.

Fitch expects U.S. metallurgical (met) coal exports to drop to between 44 million and 55 million tons per year. Domestic consumption of met coal is about 22 million tons per year.

The flooding in Queensland, Australia beginning in December 2010 resulted in a supply squeeze and, coupled with strong demand from China, very high met coal prices. Coal producers made acquisitions in 2011, seeking more exposure to met coal.

At the same time, new projects were being funded in Mozambique, Mongolia and Australia. The seaborne met market has been oversupplied by roughly 10% since late 2012, despite prices falling 48% since that time as Australia's additions have outweighed cuts and demand has failed to grow. Global steel production was down nearly 2.4% for the year as of Sept. 30, 2015, compared with the same period in 2014. Steel consumption in China looks to be down nearly 6% over the same period.

For more information, please see Fitch's special report titled, "U.S. Leveraged Market Quarterly," which is available at www.fitchratings.com

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

U.S. Leveraged Market Quarterly (Third-Quarter 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=872516

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Source: Business Wire (November 9, 2015 - 10:30 AM EST)

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