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