Pandemic may further weaken US coal market

More US coal mines may close and more producers may have to file for bankruptcy if the coronavirus pandemic leads to a meaningful drop in power demand, analysts and market participants said.

Electricity use has already declined by about 10pc in March in much of the northeastern US as businesses were forced to close to try to slow the spread of the virus, Moody's Investors Service said in a report on the coal industry. Significant business closures are expected to continue into April, resulting in a further decline in power demand and less coal purchases, said Moody's lead coal analyst, Ben Nelson.

Some utilities and grid operators, if not all of them, are having difficulty forecasting electricity use since this is an unprecedented event. The Midcontinent Independent System Operator, which reported an 18pc decline in peak power demand this month from a year earlier, said it will only gain more clarity on projections once usage patterns emerge.

Coal market participants said a sustained drop in electricity use will lower coal demand even further than it has already declined. Producers have already been struggling for months to find buyers because of cheap natural gas, the mild fall and winter, continued coal plant retirements and low export prices. These conditions have led coal prices to fall to multi-year lows and driven producers to scale back production.

From 1 January-21 March, US coal production totaled 134.5mn short tons (122mn metric tonnes), an 18pc decrease from the same period a year earlier, according to the US Energy Information Administration.

Nelson said it is not a matter of whether more mines will close, but when.

"I am very confident in saying it is going to get worse," he said.

Moody's projected in January that US coal production would fall by 15-20pc in 2020 to about 550mn-600mn st. But Nelson said production could now potentially decline by as much as a third from last year.

A US coal producer said this week he also expects more mines to close.

"It was bad enough before all this started," he said, referencing an "absence" of winter weather.

Only two US coal producers have thus far closed their mines because of the coronavirus outbreak. Rhino Resource Partners and Blackhawk said on 20 March that it was closing for at least two weeks out of concern for employees' health. While other producers are continuing their operations, they are nonetheless nervous about coal miners becoming infected with the virus. They are also concerned about greater financial difficulties.

The National Mining Association last week asked Congress and the White House to suspend some taxes as the country tries to contain the pandemic.But the industry will receive no direct aid from the $2 trillion stimulus package that Congress passed this week.

Moody's said the coronavirus' affect on producers will be mixed.

Thermal coal producers that have lower output costs and enough cash on hand to offset pressure from low prices, such as Alliance Resource Partners, may gain market share and be better able to service debt obligations, the ratings agency said. But others, like Consol Energy, which "has reduced debt aggressively" in recent years, owe more to lenders and have less anticipated cash flow to further reduce debt.

At least one major US coal producer, Contura Energy, has boosted its cash cushion. The company said on 23 March that it tapped $57.5mn under its revolving credit facility as a "proactive, precautionary measure" in light of the coronavirus pandemic and "its potential effects upon national and world economies."

Contura has about $120mn in outstanding letters of credit under the facility. It said it will use the cash to preserve liquidity "amid the growing uncertainty surrounding the [coronavirus]."

Smaller and mid-sized thermal coal producers may struggle to keep afloat as well.

"I see this as being a really rough year on marginal players," a coal producer said.

Moody's also had a "darkened" outlook for US coal-fired power plants. It said its view was dimmer particularly for plants in the mid-Atlantic and industrial midwest, which have been "economically challenged" for a number of years.

"The developments in the past few months have conspired to push them into an even more perilous position," the ratings agency said.

Even before the coronavirus spread to the US, coal-fired generation was falling because of mild winter weather and competition from cheap natural gas. Coal power across the US was 36pc lower in January than it had been a year earlier, according to EIA data. It was the lowest level of coal output for the month of January in at least 48 years.

By Nick Georgiou