Deeper and faster coal production cuts needed
US coal companies should be far more aggressive in closing mines if the oversupply in the US market is to be resolved. Failure to do so is to miss the “fundamental point of this depressed market,” the Institute for Energy Economics and Financial Analysis concludes in a recent report into Peabody Energy’s recent financial performance.
Peabody recently reported a full-year loss of US$1.86 billion from its continuous operations and lowered its outlook for coal demand at US utilities by 40 – 60 million short t. That, combined with an expected running down of power plants stockpiles, could see US coal shipments fall by 150 – 170 million short t in 2016.
“Current coal markets […] highlight the fact that the coal industry in general […] must become substantially smaller to [survive]. More mines need to close,” argue the report’s authors, Tom Sanzillo, Tim Buckley and Clark Derry-Williams.
Looking specifically at Peabody, the report calls the company’s production reduction plans “inadequate and [not] fully responsive to the declining price of coal”. Moreover, it current strategy of asset divestments risks exacerbating the problem as the buyers of those assets continue to flow of unwanted coal onto the market.
“Peabody is trying to manage its debt problems by selling mines for cash to competitors who will then further flood an already oversupplied market,” the report continues. As a result, “Peabody’s debt management plans – asset sales, debt exchange and self-bonding cost control – will be insufficient even if they are successful.”
Sanzillo, Buckley and Williams-Derry conclude that “if coal prices have any chance of turning around, the company must use the primary tool it has in its control: closing mines to drive down the supply of coal commensurate with market demand.”
That criticism was echoed by coal industry analyst, Stephen Doyle, founder of Doyle Trading Consultants and President of BtuBarron, who called Peabody’s results “every bit as ugly as they appear” in an emailed statement to World Coal.
According to Doyle, proposed production cuts in the US coal sector have come “way to late”.
“The mantra of 2014 was how much liquidity the coal companies had – including those who have since filed for Chapter 11 [bankruptcy protection]. Instead of collectively using that liquidity to close production, the coal companies collectively thought they all could be the last man standing,” Doyle said.
Edited by Jonathan Rowland.