NACM Industries to Watch: Non-Energy Natural Resources/Raw Materials

Extraction of resources for energy production continues to grab headlines as there are companies perennially facing solvency challenges in this new era of increased supply and dropping prices. However, natural resources and raw materials used for non-energy purposes are falling under increasing pressure of late, as illustrated by another bankruptcy filing in the sphere this week.

Birmingham-based Walter Energy, Inc., a metallurgical coal producer for the global steel industry, and its U.S. subsidiaries, have filed in the Bankruptcy Court for the Northern District of Alabama. The company previously negotiated a restructuring agreement with certain senior lenders in a case pertaining to its U.S. operations (those in Canada and the United Kingdom were not included in the filings).

“In the face of ongoing depressed conditions in the market for met coal, we must do what is necessary to adapt to the new reality in our industry," said Walt Scheller, Walter Energy CEO. The firm said it has sufficient cash to assure that vendors, suppliers and other business partners will be paid in full for goods and services that they provide during the reorganization process.

One of the problems facing the industry stems from the fact that non-energy commodities (iron ore, steel, aluminum, etc.) are traded in U.S. dollars, now a stronger currency than in many years, yet most of the manufacturing takes place in countries where the dollar is not the dominant currency, said Martin Zorn, CEO and president of Kamakura Corporation, which analyzes and reports monthly on corporate credit quality and solvency risk. This can lead to a host of foreign exchange problems, as a number of publicly-traded companies in various industries have noted surprisingly disappointing earnings this year.

Weakness for domestic producers isn’t the only, or perhaps even most significant, headwind damaging the industry. The much-discussed slowing of the Chinese growth rate in the last couple of years means drastically reduced global demand for iron ore, steel and aluminum, among other commodities. Slower Chinese importing is becoming an increasing financial issue for resource-rich countries in South America, Canada and especially Australia where more than one-third of all exports are destined for China. No industry is more important to that country’s GDP than mining, according to Coface’s 2015 Country Risk Report.

“Australia’s mining sector is very much tied to the Chinese economy,” Zorn told NACM this week. “We’re going to continue to see a lot of pressure on natural resources companies there.” If problems escalate into insolvency or even just the brink of it in many cases, many other sectors could face financial problems in Australia, one of the top destinations for business among NACM members’ companies.

- Brian Shappell, CBA, CICP, NACM managing editor and Diana Mota, NACM associate editor

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