King Coal Falling – 1/29/16

Coal is unlikely to recover from the current commodity glut in the U.S. as even bankruptcies fail to force supply in line with plummeting demand.

Most coal companies took on debt to promote growth while China’s demand growth still seemed unstoppable. Now that Chinese officials are putting into effect massive cuts in capacity for heavy industry, the best coal mines of bankrupt producers are passing into new hands while many mines too unprofitable to run at any level of output are being shut down. With competition from cheaper, cleaner natural gas combined with falling overall demand and tightening environmental rules will continue to be a burden on coal producers, especially with prices expected to remain at glut levels for most of 2016. The coal glut has been especially unkind to West Virginia and Wyoming which have large mining sectors dependent on the natural resource to create jobs.

The U.S. may never again need coal like it used to, but China and India are still on track to consume large amounts for decades. Although China’s usage is set to drop as overcapacity in steel and other coal-intensive industries falls, the country is still likely to use staggering amounts to maintain more efficient production and meet electricity needs. And India is set to bring new coal-fired power plants online to meet the energy needs of hundreds of millions without sufficient access. That said India’s GDP is 1/5 the size of China’s, so even if India can hit the growth benchmarks that China will be missing from now on, the country is too small a market to absorb current oversupply for now. One thing is for sure, current levels of supply are outrageously high relative to demand. Producers will need to consolidate and focus on fewer, more cost-effective mining operations supplying less dependable markets.

Coal won’t die off but the industry as a whole is not likely to regain market share in the U.S. anytime soon.

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