The coal industry is in no way a new area of concern to market-watchers and creditors. But the challenges, from demand, home and abroad, to government intervention seem to be stacking up in the short term. But there may be hope, albeit of the cautious variety, of an export-led turnaround. It just isn't likely to be off NACM's “Industries to Watch” radar in fewer than one or two years.
The list of experts warning of the short-term prospects for financial problems in the coal industry isn't short. NACM sources therein include Bruce Nathan, Esq., partner with Lowenstein Sandler LLP; Ed Altman, PhD, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions; and Adam Rosen, director of PricewaterhouseCoopers LLP's financial restucturing group.
Perhaps the biggest threat to the industry stems from safety disasters that have trapped and killed miners as well as environment concerns over pollution. The Obama Administration's regulatory efforts affecting coal mines has accelerated in recent years. This month, the administration and the Environmental Protection Agency leaked plans to ban construction of any new coal-fired power plants not designed to meet the highest technological standards for limiting emissions. That is a massive expense. Also pricey is the bevy of safety upgrades called for at dozens of existing operations.
Rosen, who represents the United Mine Workers of America in one of the most known Chapter 11 cases in the industry (Patriot Coal), said regulations have led to a quadrupling of temporary mine closures. The worst hit basins (industry term for region) are in Central Appalachia and Northern Appalachia, with 42 and 11 closures, respectively, so far in 2013 alone.
“With all the environmental regulations being imposed, rather than spending hundreds of millions to get the plants up to code, they're just shutting down,” Nathan said. “That's a trend you are going to continue to see.”
Producers are also dealing with price softness from an enemy that will intermittently show itself for a long period into the future: natural gas. With natural gas and shale presently flooding the market and, thus, the prices of it dropping, there has been a downside effect on domestic demand for coal used for energy.
“Natural gas is a permanent concern for the industry and a real obstacle,” Rosen told NACM. “There are plants that have the ability to switch from natural gas to coal and vice-versa when the pricing changes. When natural gas is depressed, it makes for an unfavorable environment for coal.”
However, Rosen said natural gas prices have been strengthening, which is good for the coal industry. There have also been projections of improved demand abroad in places like Australia. But improvements there and in China, which relies heavily on coal to power steel-making plans, could be 12 to 18 months off, Rosen said. Even then, China is a wild card. Just in recent days, the government banned coal-powered plants in three industry regions, including part of Beijing, because of massive pollution problems.
In the meantime, Rosen and Nathan warn trade creditors with debtors tied to the coal industry to look closely at factors like their cash availability as well as, importantly, the other availability it has to borrow over the next one to two years. There is still opportunity with those in the coal industry that are prepared to withstand a year or two, at least, of troubled waters.
-Brian Shappell, CBA, CICP, NACM staff writer