China’s steel dragon has lost its appetite for American coal – by John Dizard (Financial Times – July 3, 2015)

It may be too late to save the coal industry from looming financial disaster, says John Dizard

As the headlines earlier this week told you, the US coal industry scored a win at the Supreme Court. With a 5-4 majority it ruled that the Environmental Protection Agency had to consider compliance costs when it issues emissions rules for power plants. The court sent the Mercury and Air Toxics Standards (Mats) back to the agency to justify its net economic benefits.

Whatever short-term cheer this brought to the coal-mining companies, it has come too late to save most of the industry from looming financial disaster. Coal company shares and bonds bounced up for a day and then fell back into depression.

Most US coal capacity, more than 500m tons of annual production, is owned by companies in financial distress. The unsecured bonds of Arch Coal, behind which are more than 130m tons of capacity, are selling for 14 to 17 cents on the dollar. Peabody Coal (about 200m tons of capacity) has a bond maturing in 2018 that is priced at 48 cents on the dollar.

Even after the oil and gas price plunge, many oil and gas exploration and production companies with big reserves and negative cash flows have been able to raise new equity and refinance debt. The coal trade, on the other hand, is attracting little investor interest.

It is not that coal-fired power is going away any time soon, despite the best efforts of environmental activists, the career staff of the EPA and their supporters in the Obama administration. Even in the next decade, coal-fired power will provide more than a third of US power. Those utilities and merchant power plants will be buying their coal from new mine owners, though. Their predecessors will have gone broke.

The coal-mining industry’s death march will have been driven by two forces that have nothing to do with environmental activism: the lowering of natural gas prices and the deflation of the China steel production bubble.

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