The US coal industry has weakened after taking the brunt of lower electricity demand and is now highly vulnerable to resurgent covid-19 infections that could further reduce demand for coal in a downside scenario, Moody’s Investors Service said in a report published on Wednesday.
The credit rating agency expects a ‘very weak’ second-quarter earnings for coal producers.
“In 2020, demand for electricity has fallen sharply since March, largely because of the economic impact of the pandemic, and we expect that consumption of coal by the electric power sector will fall by more than 30% in 2020,” says Benjamin Nelson, Moody’s VP-Sr Credit Officer.
Export prices had been weakening since the second half of 2018 and have deteriorated further following the coronavirus. Metallurgical (met) coal price fell from $200/mt in June 2018 to close to $110/mt in June 2020, Moody’s reports.
Volumes are also under stress with the slowdown in the global steel industry. Global production was reduced by about 5% through May, including steep declines in North America, European Union, and South America combined with a modest increase in China.
Coal producers’ liquidity has also weakened markedly in 2020. At the start of the downturn, the aggregate cash balance of US rated producers was $1.5 billion, and most of them had substantial availability under revolving credit facilities along with Speculative-Grade Liquidity (SGL) ratings of SGL-1 and SGL-2—the highest on the four-point SGL scale.
The arrival of the coronavirus outbreak in the US, combined with the ongoing secular decline in demand for thermal coal and several quarters of price weakness for export coals, significantly reduced coal producers’ expected cash flow, and in some cases narrowed their expected compliance with financial maintenance covenants, Moody’s reports.
“Only the low-cost, met-focused producers such as Arch Resources and Warrior Met Coal have not experienced a recent downgrade to long-term ratings nor an outlook revision, as they have fundamentally stronger discretionary cash flow generation than their peers.”
Access to capital issues are becoming increasingly significant for the coal industry as ESG-related concerns intensify. According to the report, the pandemic will sharpen the focus on ESG risks.
“ESG issues with respect to the US coal industry have tightened access to capital for companies in the sector, as a number of investors have signaled their aversion from coal-related holdings or signaled a willingness to punish coal companies.”
While many Ba- and B-rated industrial companies have accessed the bond and syndicated bank loan markets since the start of the pandemic, coal producers have not.