Moody’s Investor Services issued a negative outlook for US coal markets, driven by weak coal pricing in thermal and met markets, in addition to dropping domestic and export demand.
“Coal pricing remains weak in early 2020, with no clear catalyst for improvement during the year after export thermal coal prices fell sharply in 2019,” Benjamin Nelson, lead analyst, wrote. “Coal producers, which increased thermal coal exports significantly in 2017 and 2018, responded by attempting to place more volumes in the domestic market, which depressed thermal coal pricing.”
According to Moody’s, while pricing for met coal looks more favorable than thermal, the met market is also likely to be weak in 2020, adding more constraints to cash flow and EBITDA generation.
“There is a greater risk for the High-Vol A market, where proceeding with recently-announced projects could worsen the effects of price weakness,” the report said. “We expect some projects will be delayed.”
Moody’s projects coal demand will drop to 550 million st this year, the lowest level since early 1970s. The US Energy Information Administration, it noted, also forecast coal demand to drop 14% to 597 million st in 2020.
“Domestic thermal coal volumes face an environment of contracting demand from coal-fired power plants, which account for most demand, cutting consumption by more than half over the last decade,” Moody’s said. “Weak export pricing makes it uneconomical to export a significant percentage of the coal that producers have exported previously, leading to a meaningful decline in exports in 2019 that will intensify in 2020.”
Met volumes, which are mostly exported, will drop as well given the weak steel industry conditions.
Moody’s also expects coal export volumes to continue dropping in 2020, “leading to significant deterioration in earnings and cash flow generation,” the report said.
Moody’s noted its prior warning on falling exports in early 2019 when it revised its outlook from stable to negative, however coal producers had yet to feel the full impact on earnings given contracts signed in a stronger environment.
“We expect that EBITDA will fall by about one-third across the rated portfolio in 2020, including some met-driven producers that could fall more significantly,” the report continued.
An additional concern for coal companies has been the increasing number of investors signaling plans to move away from the coal industry due to environmental factors.
“This shift will increase financing costs for coal companies over time, especially in bond markets, prompting coal producers’ boards to reassess the appropriate levels and mixes of debt in the coal producers’ capital structures,” Moody’s said.
Moody’s added that they expect higher-rated coal producers to act in the near-to-medium term, even though near-term debt maturities are not significant.
The lower-rated producers are more vulnerable to weak industry conditions.
Foresight Energy for one, Moody’s said, is highly exposed to the export market and is highly leveraged, faces a likely debt restructuring in early 2020, “making it the most stressed of the rated coal producers after the bankruptcy filings of Westmoreland Coal in 2018 and Cloud Peak Energy and Murray Energy in 2019.”