The struggling U.S. steam coal business, despite President Trump’s so far ineffectual attempts to end what he has called the “war on coal,” will take a big hit from the impacts of the coronavirus, according to a new report from Moody’s Investor Service. Moody’s analyst Benjamin Nelson says, “U.S. domestic demand for thermal coal will fall in the near term as individual states shut down much of the industrial economy to try to stem the coronavirus pandemic, and as slowing economic activity cuts U.S. electricity demand in the second quarter of 2020.”
Moody’s perspective on the impact of the pandemic on coal is part of the credit rating agency’s views on the world economy. Moody’s says it “expects an unprecedented shock to the global economy in the first half of 2020.”
The headline on the Moody’s coal report: “Environmental, social, governance issues limit industry’s resistance to pandemic.” Noting that U.S. electric utilities have been moving steadily away from coal over the last decade, Moody’s said, “Before the intensification of the coronavirus pandemic in the US, we expected that coal production would fall by 15%-20% in the US, to about 550-600 million tons. We now expect that industry conditions will worsen beyond this forecast – driven by our view that commercial and industrial demand for electricity will weaken.”
The pandemic comes as the steam coal producers have faced heavy headwinds. Says Moody’s, “The outlook for coal-fired power plants in the U.S. has darkened over the past few months, particularly for coal plants in the MidAtlantic and the industrial Midwest. These coal plants have been economically challenged for the past few years, generating minimal to negative cash flows. The developments in the past few months have conspired to push them into an even more perilous position.”
At the same time, “environmental, social, and governance-related issues” have slammed the coal industry’s access to capital, both equity and debt. The pandemic “adds to the uncertainty.”
The coal export business, which rescued steam coal producers from falling domestic demand in 2017 and 2018, won’t come to coal’s aid in 2020. The report notes, “Falling export volumes contributed to Foresight Energy’s recent bankruptcy filing and will limit export opportunities for other rated producers over the next few quarters.”
The pandemic will also weaken the historically stronger market for metallurgical coal, says Moody’s. The met coal outlook “remains uncertain – with clear downside risk.” While U.S. producers sell most of their coal to European steelmakers, “demand in Europe has softened (particularly with the auto-related shutdowns) and, to , to the extent that U.S. steel producers idle capacity at blast furnaces on declining end market demand, met coal producers serving the U.S. market would be hurt.”
The coal industry’s credit position is soft, says Moody’s. “About three-quarters of rated U.S. coal companies have negative outlooks today – indicating weakly-positioned ratings.”
Will the federal government come coal’s rescue, as President Trump promised to states such as West Virginia, Kentucky, and Wyoming during the 2016 campaign? “We will consider any prospective government aid, though we see that scenario as less likely today.”
— Kennedy Maize