Wilbur Ross is a billionaire that made his money by building a coal company out of various distressed coal assets here in the US (called International Coal Group Inc) and sold the company last year for $3.4 billion to Arch Coal (ACI).
Ross now says that the coal industry is changing and could be facing a slump unlike any other. The billionaire says that the shale-gas boom is heating up and causing various power plants and other entities to switch from coal powered to natural gas powered.
In addition, a warm winter combined with a hot summer and new environmental regulations are currently putting a choke hold on the industry. With US demand for coal at 24 year lows, many companies have been forced to cut jobs and close mines to cut costs. Unfortunately, Patriot Coal is the latest victim as the company just recently filed for bankruptcy last week. Ross further commented that he does not see any buying opportunities currently in the coal industry.
“Last time the cycle was this bad, the problems were essentially just cyclical,” says Ross. “This time the major secular trends are far more likely to be unfavorable for years to come” Credit: Bloomberg.
As natural gas prices have already hit a 10 year low this year, many utilities have been pondering switching to cheap, cleaner natural gas from expensive, dirty coal. Coal consumption by the utility sector fell 19% during the first quarter, while the use of gas was up 32%. Coal companies just cannot sustain margin cuts that dramatic without some sort of fallout, bankruptcy.
To add to the negatives, the US Environmental Protection Agency proposed limits on power plants regarding harmful pollution into the air. The new requirements have placed a new requirement of 1,000 pounds of carbon dioxide per megawatt hour, about the same environmental limits on a natural gas power plant.
Investors will continue their bearish thesis on coal until the cycle once again changes. Until that point, we may see a majority of coal miners either go out of business or be acquired. Luckily, there will only be a few big players left in the industry. The EIA is predicting that coal as a power source will decline 9% this year which equates to about a cut of 97 million tons to producers.
While the US is moving away from coal, China still continues to be a big importer of the power source as the country looks for power sources for its expanding economy. Unfortunately, coal companies can not even rely on China anymore as domestic conditions are slowing down and the government looks to prop up the economy.
The bottom line here is that coal in the US may be on the way out, certainly a significant reduction at least. More coal companies are likely to follow Patriot coal into bankruptcy with only a few dominant players left over in a weakening industry. China is not as reliable anymore for coal producers as the country looks to stop its slowing growth. Continue to watch signs of weakening momentum in the coal industry.
Disclosure: No Positions