The last pillar of America’s coal industry has fallen.
Last week, Peabody Energy (BTU), the largest U.S. coal miner, filed for bankruptcy. Its stock has stopped trading on the New York Stock Exchange. Peabody was the last major U.S. coal miner still standing. Arch Coal, Alpha Natural Resources, Patriot Coal, and Walter Energy all filed bankruptcy within the past year.
The price of coal has plunged 75% since 2011.
The U.S. simply has too much coal. Coal production hit a record high in 2008. That year, America entered its worst financial crisis since the Great Depression. Coal demand fell and never recovered.
On top of that, the U.S. government is trying to regulate the coal industry to death. Strict laws have made it almost impossible for coal to compete with natural gas, a cleaner fuel source. Natural gas is set to overtake coal as America’s main source of power this year, according to the Energy Information Association (EIA).
America’s largest coal miners can’t pay their bills.
Peabody, for example, owes its lenders $10 billion. The company over-expanded when times were good. In 2011, Peabody bought Macarthur Coal, an Australian coal miner, for $4 billion. Its timing couldn’t have been worse, Bloomberg Business reported yesterday:
Peabody Chief Financial Officer Amy Schwetz said in court filings that after the MacArthur purchase and other acquisitions the following year, international coal prices began a downward cycle, making the company’s debt unsustainable. Peabody has lost money nine quarters in a row. Unable to pay its debt, the company is seeking bankruptcy protection. When a company goes bankrupt, it doesn’t necessarily shut down. Often, bankrupt companies will strike a deal with their creditors to keep their doors open.
According to The Wall Street Journal, bankrupt coal miners now account for half of all U.S. coal production. Like all commodities, the coal market is cyclical. It goes through booms and busts. When coal prices are high, companies ramp up production. They hire more workers, develop new projects, and acquire other companies. Eventually, supply overshoots demand and prices fall.
Peabody was the largest U.S. corporate bankruptcy this year.
It certainly won’t be the last. According to credit agency Standard & Poor’s, 40 companies have already defaulted this year. That’s the most at this point in the year since the 2009 financial crisis. At this rate, 138 companies could default this year. That would be 30% more than last year and nearly triple the number of defaults in 2014.
Giant natural gas companies are also fighting to survive.
Chesapeake Energy (CHK) is America’s largest independent gas producer. Less than two years ago, the company was worth $20 billion. Today, it’s only worth $3.5 billion. The price of natural gas has plunged 55% over the past two years. Last month, it hit its lowest level since 1999. Like coal, the U.S. has too much gas. New technologies like “fracking” have unlocked huge amounts of natural gas that were impossible to extract before.
Chesapeake lost nearly $15 billion last year.
Like Peabody, it’s now struggling to pay off the debt it took on during the last boom. It owes about $10 billion, which is more than double the company’s current market value. Earlier this week, Chesapeake received a $4 billion line of credit. The company had to put up all of its assets as collateral for it. In other words, Chesapeake went on “financial life support.”
Chesapeake’s share price jumped 34% on the news. But it’s still down 62% over the past year.
Many of the world’s largest mining and energy companies are fighting for their lives.
This is a classic sign of a bottom. As Dispatch readers know, commodities have been in a bear market for the past five years. The Bloomberg Commodity Index, which tracks 22 different commodities, has plunged 58% since 2011. To survive the downturn, companies have laid off hundreds of workers…cut spending by billions of dollars, and sold parts of their business. For many companies, that hasn’t even been enough.
Does this mean commodities have bottomed?
We’re likely near a bottom in commodities. But for now, there’s still too much oversupply to call this the bottom. As Dispatch readers know, the world is simply producing more oil, coal, and natural gas than it consumes right now. Plus, commodities are the “building blocks” of the global economy. And if you’ve been following our work, you know the global economy is stalling. China, the world’s largest commodity consumer, is growing at its slowest pace since 1990. The U.S., Europe, and Japan are all growing at their slowest pace since World War II.
Eventually, commodities will boom again.
The modern world can’t run without steel, lumber, oil, coal, and other natural resources. The next commodities bull market will likely look like a mirror image of the last five years. Companies that plunged 50% could easily double or triple.
However, making money on America’s next coal boom will be tricky. In 1990, coal accounted for 50% of the electricity generated in the U.S. It now accounts for 33%. By 2040, the EIA expects it will still deliver 20% of America’s power. This suggests that the coal industry will eventually recover. However, as we mentioned, five of America’s biggest coal miners have gone bankrupt in the past year. These companies no longer trade on the stock market.
There simply aren’t many publicly-traded U.S. coal companies left standing. Folks who want to bet on a rebound in the U.S. coal industry don’t have many options. Even the largest U.S. coal stock fund, the Market Vectors Coal ETF (KOL), holds more Chinese and Australian coal companies than American coal companies.
Delray Beach, Florida
April 14, 2016