The Wall Street Journal | A Coal Boom to Fear
The booms and busts in metallurgical coal turn fast, often with dire consequences
For some miners, the coal boom they had long hoped for has arrived. Now all they have to do is resist the urge to burn it away.
Coal prices are soaring for the type of coal used in steelmaking because of cyclone damage in Australia, center for the world’s trade in so-called metallurgical coal. Tropical Cyclone Debbie washed out several railroads, and that may block enough shipments to erase all the global supply growth analysts had expected this year. There are already reports of Chinese buyers calling U.S. suppliers to fill the gap, according to Clarksons Platou Securities in New York.
Spot prices rose 32% for Australian coal on Wednesday alone, the biggest one-session rise ever for the world’s metallurgical coal spot benchmark, according to S&P Global Platts. It now costs $241 a metric ton, more than double prices from a year ago.
Spring futures had been on a tear, too, since the cyclone hit a week ago. With traders now realizing how damaged the railroads are — estimates have several out for two to five weeks, according to Platts — April futures posted another big day of gains Wednesday and are up about 50% in less than two weeks.
“What looked like a year in which supply could potentially overwhelm demand has quickly done an about face,” Mark Levin, analyst at Seaport Global Securities LLC, wrote in a note Tuesday.
It is a quick turnaround for a market that had been one of the worst of all commodities. Prices spent most of the past several years hurtling toward a decade low, putting the U.S.’s largest publicly traded miners into bankruptcy.
That’s the problem for coal companies: The booms and busts in metallurgical coal turn fast, often with dire consequences.
What’s playing out in Australia now is very similar to a cyclone and flooding that cut the country’s coal output and sent prices to record highs less than a decade ago. U.S. companies responded then by borrowing billions of dollars to buy rival mines they could plumb for more metallurgical coal.
But prices quickly tumbled and those U.S. coal companies had to shut down mines they bought just a few years prior. The lingering debt then led to a wave bankruptcies.
“You had guys chasing projects in Mongolia, the U.S., Australia and Mozambique which were majorly flawed,” said Ryan Welker, head of mining at investment advisory EAS Advisors LLC in New York and founding partner of Vitrinite Coal in Australia. “And there was credit to support irrational wagers on very early stage, undeveloped assets and marginal producing assets.”
The industry has to think differently this time – and will probably be forced to, Mr. Welker and others said. Demand isn’t growing for their bigger product, the coal that feeds power plants. Some of the biggest coal-burning power plants are at risk of shutting down, possibly adding to the scores that have already closed.
Peabody Energy Corp. is the latest to emerge from bankruptcy just this week. Debt markets are open again, but not nearly as friendly as they were before the bankruptcies wiped out billions in investments, executives and investors said.
Some investors and analysts have encouraged coal miners to avoid overexpansion and stay slimmed down to match a slimmer market. Surging metallurgical coal prices will help U.S. miners all year, but that isn’t enough to get debt buyers to fund another wave of highly-leveraged deals, said Matthew Gray, managing director at Highland Capital Management LP, which manages $15 billion in assets.
“If a coal miner would come to the market with a deal with a significant amount of leverage, the market would push back on that,” said Mr. Gray, whose firm owns shares in Arch Coal “Going through this … bankruptcy wave should be helpful at instilling discipline.”
It remains to be seen whether the broader market agrees. At least a half dozen U.S. coal firms are preparing or exploring public offerings. Almost all of them make a big portion of their revenue from metallurgical coal, and big gains in that market are central to their sales pitch to investors looking for a way to bet on one of the wildest commodity markets there is.
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