US coal industry’s cost cuts not enough to offset weak prices

US coal industry’s cost cuts not enough to offset weak prices

A sharp drop in U.S. coal prices in the past four years is offsetting cost cuts by producers, causing average sales margins to fall by roughly half since 2011, an SNL Energy analysis of coal production costs shows.

The U.S coal industry has had a rough time in recent years. Between late 2010 and the end of 2014, the top ten publicly-traded coal companies saw their combined share price value drop by more than half, as hundreds of plants closed and thousands of employees were laid off.

But the extreme cost cutting measures adopted by U.S. coal producers have not been enough to offset the effects of depressed commodity prices, an SNL Energy analysis of coal production costs shows.

According to the report, average sales margins for coal miners have fallen by about half since 2011, forcing players to cut production and implement severe costs cuts. Despite the efforts, three of the nation's largest publicly traded producers, as well as several smaller private producers, have filed for bankruptcy protection this year.

One of them was Alpha Natural Resources (OTCMKTS:ANRZQ), the nation’s largest producer of metallurgical coal, which declared Chapter 11 bankruptcy last month.

Earlier, Murray Energy Corp. — one of the top producers in Northern Appalachia and the Illinois Basin — unveiled its plans to layoffs around 1,800 workers. Another West Virginia-base producer, Patriot Coal Corp., filed for bankruptcy protection for the second time in early May, and said it was engaged in negotiations for the sale of substantially all of its operating assets to a potential buyer.

SNL’s report shows how sales margins have tumbled amid a much bigger drop in coal prices:

Per-ton sales revenues for those same eight companies averaged $36.56 per ton in the second quarter, down by 7.3% from a year earlier and off more than 18% from the last quarter of 2011. Average margins decreased to $7.11 per ton as a result, down 24% from the second quarter of 2014 and 49% below the end of 2011. Average revenues include new spot sales and shipments under legacy contracts.

The revenue decline has been particularly steep for coking coal-heavy producers that enjoyed a surge in pricing in 2011 from rapid economic growth in China and supply constraints tied to flooding in Australia.

President Barack Obama’s new Clean Power Plan, aimed at reducing carbon emissions, isn’t likely to make things any easier for U.S. coal producers.

According to recent report by BB&T Capital Markets Inc., the emissions ceiling imposed will mean that the coal sector will only have 650 million tons of annual demand, down from the one billion the industry was used to not long ago.

US coal industry’s cost cuts not enough to offset weak prices

Courtesy of SNL Energy.

The country’s total coal production has shrunk about 15% since 2008, and coal stockpiles keep growing at mines as coal-fired power plants shut down month after month.

The commodity, which once fired half of the country’s power now accounts for just under 40%. And the Energy Department projects that percentage will slide further, to 34% in 2040, as power plants turn to natural gas and renewables like wind and solar power.