Opinion: Coal can learn from oil, gas cycles

OREANDA-NEWS. June 09, 2015. Financial and market challenges facing US coal producers must look familiar to domestic oil and natural gas companies, which have survived their own major boom-bust cycles.

Oil, natural gas and coal producers in the past year have faced declining commodity prices and the resulting need to adjust production, albeit to varying degrees.

The parallels are not lost on the coal industry. Some producers believe they are better equipped to deal with uncertainty in the market than their oil and gas peers. "Our industry has fewer players and a better definition of our market," Alliance Resource Partners chief executive Joseph Craft says. "It is less uncertain than the oil and gas space."

But the uncertainty facing US coal producers does not stem from declining commodity prices alone. Regulatory pressure and competition from natural gas and wind are shrinking the domestic market for coal in electricity generation.

US coal output this year is expected to be 15pc lower than in 2011, the Energy Information Administration (EIA) projects. Coal output by 2030 could be 29pc below its 2006 peak, if the Clean Power Plan rules for limiting power sector CO2 emissions take effect. The coal industry has never seen such declines. And exports cannot make up for the lost domestic demand.

By comparison, US crude production dropped by 55pc from 1970-2005, before the shale boom transformed the sector's prospects. Natural gas output fell by 26pc from its 1973 peak before bouncing back as a result of shale exploration.

Technological breakthroughs appear unlikely for coal extraction. And the economics of carbon capture and sequestration remain largely elusive.

Traditional responses to the bust cycle in extractive industries include trimming labor forces, cutting production costs, finding new markets and merging with rivals.

US coal companies already are announcing layoffs and idling mines. But boosting productivity is a key challenge. EIA data show declining productivity in the past decade for both surface and underground coal mines. Proposed tweaks to federal stream protection rules may limit surface mining's productivity growth. And labor contracts are tough to re-negotiate.

Coal producers' financial struggles are hampering their ability to raise funds externally and to refinance for restructuring or to refinance existing liabilities. The market capitalization of the five largest US-based coal producers today is barely \\$2bn, down from \\$18bn in 2011.

And coal companies are targets of public campaigns aimed at prodding large banks and institutional investors to cut their ties to the sector. That kind of pressure is unlikely to deter hedge funds, private equity and other non-banking institutions hungry for investment opportunities. But the sector will have to persuade potential investors to weigh the opportunity to buy cheaply into production and reserves against negative market outlooks and troublesome balance sheets.

Coal producers can learn from US oil and gas firms that have weathered decades-long production declines. But they will have to navigate their way through a changed marketplace with a permanently smaller customer base.