Fitch Warns Coal Sector May Experience Higher Incidence of Bankruptcy

Author: Joel R. Glucksman|March 1, 2013

A grim warning from credit rating agency Fitch Ratings estimates that a number of coal mining businesses may be in danger of falling into bankruptcy.

Fitch Warns Coal Sector May Experience Higher Incidence of Bankruptcy

A grim warning from credit rating agency Fitch Ratings estimates that a number of coal mining businesses may be in danger of falling into bankruptcy.

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Fitch reported that a persistently weak and volatile economy has been a large contributing factor to falling coal sales. Coupled with this is increased competition with less expensive natural gas resources and rising costs due to more stringent environmental regulations. As a result of these factors, Fitch said that demand may continue to wane and prices are likely to inflate over the course of the year, both of which may force a number of companies to seek protection under bankruptcy law.

The agency noted that two coal producers are already facing significant default risk, and since 1994, there have been 11 mining company defaults among producers with assets of at least $25 million as of the bankruptcy filing date. In addition, the asset size of those companies seeking protection has also ballooned in recent years. For example, Fitch notes that Patriot Coal Corp., which filed for bankruptcy in 2012, was more than 11 times the asset size of the next largest defaulted coal company.

The most recent bankruptcy filing among coal mining companies was America West Resources Inc., which filed for protection on Feb. 1, 2013.

John Eaves, chief executive of leading U.S. coal producer Arch Coal Inc., told Reuters that a number of factors will determine whether sales and demand rebound in the future. Arch, which sells thermal coal that is used to generate electricity, and metallurgical coal which is a steelmaking raw material, experienced a quarterly 15 percent drop in sales volume during the last three months of 2012.

“Global benchmark metallurgical prices declined 50 percent since their peak a year-and-a-half ago while U.S. thermal coal consumption declined to levels we haven’t seen since the mid-90s,” Eaves said in a conference call, according to Reuters. “Needed economic activity, unseasonably warm weather and low natural gas prices … dampen coal demand, causing coal stockpiles to grow to near record levels by May of last year.”