There's No Relief in Sight for U.S. Coal Miners

The price of coal continues to decline despite a slight bounce, and things are only going to get worse.

Jul 21, 2014 at 12:42PM

Thanks to some solid GDP numbers from China earlier this week, coal investors had reason to celebrate. Alpha Natural Resources (NYSE:ANR), Arch Coal (NYSE:ACI), and Peabody Energy (NYSE:BTU) saw their share prices soar as traders placed confidence in the return to growth of China's economy.

This optimism may be short lived, however, as coal prices continue to decline. 

Trouble ahead
The coal pricing environment has been weak for some time now. Metallurgical coal prices are still bouncing around their lows, but steam coal prices have recovered strongly. Steam coal prices have recently weakened following a rally, however, and this could signify inventory restocking. If inventories are stocked then demand is falling, and this could cause the recent weakness.

Fortunately, around 16 million tons per annum of coal production capacity has been taken out of the market during the past year or so; this is good news for the market. These production cuts are expected to flow through the system over the next few months.

No relief in sight
According to Moody's Investors Service, most U.S. production is unprofitable at current prices, and as much as half of global output is making a loss. The market for metallurgical coal was oversupplied by about 30 million metric tons at the end of the first quarter, pushing benchmark prices to a six-year low of $120 per ton.

According to Moody's, U.S. coking coal miners won't be profitable until the benchmark price reaches $160 to $170. The group of miners could supply over 50 million metric tons this year, while burning more than $1 billion in cash; that's an unsustainable level of cash burn.

Collapsing demand
While capacity is falling out of the market, the coal industry's existence is still under threat, especially within the U.S. New legislation announced by the U.S. Environmental Protection Agency is set to flatten demand for the black mineral as coal-fired power plants disappear from existence.

The EPA's rules will make it virtually impossible to build new coal power plants within the U.S. without carbon capture and sequestration technology. Many coal-fired plants are too old to bother with this technology, so owners are planning to close their doors. Around 15% of existing U.S. coal burning capacity is due to shut down by 2016.

With around 90% of coal produced within the U.S. being used for electricity generation, even a small reduction in demand will have a significant impact on prices. A decline in demand of 15% will really hit coal prices.

On life support
It remains to be seen if Arch, Peabody, and Alpha will actually be able to survive a 15% decline in demand. Unfortunately, the fact of the matter is that each company will benefit if another goes under.

As miners collapse under low prices, the supply of coal into the market will fall. This should push prices back up, but it will be too late for some.

Cliffs Natural Resources is already feeling the pain. As the company fights an expensive proxy battle and suffers from a fall in the price of iron ore, the company has been forced to idle its Pinnacle metallurgical coal mine in West Virginia.

Cliffs does not give per-mine cost figures. However, the company reported that each ton of coal it produced during the first quarter cost $100 to mine. The same ton of coal sold for just $89. Including depreciation, the company reported a loss per ton in excess of $30. This is likely to be the first of many large coal mine closures.

The bottom line
The fact of the matter is that the coal industry is struggling, and there appears to be no letup in sight. The price of coal continues to decline, and the declines have only been compounded by rising oversupply within the market. It would appear that a significant supply will need to be taken out of the market before prices stabilize. 

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers