America’s natural gas boom has claimed its biggest victim so far with Patriot Coal — one of the country’s biggest miners of thermal and coking coal — collapsing with assets of $US3.5 billion. St. Louis-based Patriot filed for Chapter 11 bankruptcy reorganisation on Monday, US time. The collapse shows the pressures building in the huge US coal industry from changes being wrought by the shale gas boom.
That makes Patriot the largest casualty thus far of the slump in US coal demand to a 24-year low which has seen coal’s share of US electricity generation to just over 34%, (it was around 49% a year ago). That’s almost as much as produced by gas, which is up sharply thanks to the surge in shale gas production and the collapse in prices. In fact, the US Energy Information Agency reported late last month that US coal use in the first quarter was the lowest for any quarter since 1988 as power utilities have switched more and more of their plants to cheaper natural gas as regulations restricting emissions make coal costlier to burn. Gas prices fell to a decade low in April amid a surplus of the fuel.
Patriot is one of a number of US coal producers, including Peabody, Arch Coal and Alpha Natural Resources to have suffered significant share price losses in the past year as the shale (or “tight”) gas boom has seen output surge and prices fall, attracting more and more demand from power companies and other consumers. In turn that has seen a fall in green house gas emissions at a time when the US environmental rules are coming down harder on emissions from coal fired power stations.
Patriot collapsed even though it had around half a billion more in assets than its $US3.07 billion of debt. Patriot is negotiating with banks for an $US802 million debtor in possession finance package to pay for the reorganisation.
Patriot’s collapse comes after the loss of several thousand jobs in the US coal industry and the closure of a number of small private coal mines. CSX, the big US rail company reported a 28% slump in coal shipments in the first quarter as the slide in demand was made worse by a very warm winter and spring.
The EIA said that in the “warmest March ever recorded in much of the United States, coal’s share of total net generation dropped to 34% — the lowest level since at least January 1973 (the earliest date for which EIA has monthly statistics). Despite seasonally low loads, natural gas-fired generation grew markedly and accounted for 30% of overall net generation by March 2012 (see chart above). Total electricity demand fell this winter as warmer weather reduced home heating requirements.”
Coal generation fell 29 billion kilowatthours from March 2011 to March 2012, while natural gas generation increased by 27 billion kilowatthours during the same time period. In March 2012, coal’s share of total generation was 34% compared to natural gas at 30%. In April that around 34% each. As a result, stocks of unsold coal at mines have surged, leading to desperate attempts to cut production and boost exports. The Agency said that 2011 coal exports were up 31% compared to 2010, due largely to rising exports to Europe and Asia. Coal stockpiles at US power plants in March 2012 (the latest EIA data available) were about 18% above the level in March 2011 and above the five-year range.
The fall in US coal prices because of weak demand (the warm winter and Spring in the US) and the rising use of gas, has seen global thermal coal prices driven down to well under $USS90 a tonne, a situation that has already seen exports and production from Australia curtailed. In fact spot thermal coal prices from Newcastle have been as low as $US74 a tonne in the last two weeks because of the oversupply of US coal in European and US markets. Contract prices for the 2012-13 year in north Asian were written at around $US105 a tonne in February.
In the US the oversupply of coal and falling prices has seen more and power companies renege on contracts and either ask for cheaper prices, or switch to cheaper natural gas, a situation that contributed to Patriot’s collapse and threatens to badly damage other US coal companies. In fact the share prices of other US coal companies including Peabody (which has a large presence in Australia) were sold down yesterday, capping a year of losses. In fact Peabody, which terms itself as the world’s biggest coal miner, has seen its shares fall more than 65% in the past year. And at around $US6.3 billion, its market cap is little more than the $US5 billion it paid for Macarthur Coal, the Queensland miner, late last year. Peabody shares have fallen from more than $US61 a year ago to $US22.44 at the close Tuesday.
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Patriot shares lost more than US$7 billion in value this year and the shares slumped 72% on Monday on reports that it would file for bankruptcy later that day. The shares were priced at nearly $US23 a year ago. on Monday at the close they were worth just 61 US cents.
The company cut thermal coal production by more than 4 million tonnes in May, trimmed costs, tried to boost output and exports of coking (metallurgical) coal and laid off 1,000 employees and contractors. But it wasn’t enough as the company faced a growing number of customers who reneged on coal purchase contracts because of the collapse in prices drove the market price down sharply and well under the prices in the contracted deals. Those customers have either cut their purchases of coal or switched to gas.
Patriot Coal is a leading coal producer and marketer in the eastern US. In 2011, it sold 31 million tonnes of coal, of which 76% went to domestic and international power companies and industrial customers and the rest went to domestic and global steel and coke producers. It has 13 mines northern West Virginia, in southern West Virginia and in western Kentucky. It has reserves of around 1.9 million tonnes of coal. It will either be slimmed down or broken up and sold off. But it won’t be a bargain.
Given the slump in demand and the rise in US gas output, any sale won’t recover asset values in the balance sheet. That in turn will put pressure on other coal miners to cut the value of their assets, which in turn could trigger problems with banks and other financiers.