April 9, 2014 6:35 pm

US coal: difficult transition

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James River’s bankruptcy may prove to be an anomaly

Hard as it is to believe, James River Coal Company’s bankruptcy – it filed for protection from creditors on Monday – may prove to be an anomaly. As years of headlines about competition from natural gas and environmental damage indicate, the US coal industry is going through a difficult transition. But, the James River implosion aside, a few factors may soon give the industry comfort.

The first lesson from James River is that all coal can’t be lumped together. James mines thermal coal (used for power production) in Central Appalachia, which is a relatively high-cost region and is thus always at risk of being rendered uneconomic by natural gas or other regional coal basins, such as Illinois, which has become a more efficient producer. The price for Appalachian coal has fallen by a quarter since 2011, and production there is down by about the same amount. James’ market capitalisation peaked in 2011, at $900m.

And the stock price charts for other coal companies – Peabody, Arch Coal, Alpha Natural Resources, Walter Energy – all follow the general path of James River, falling sharply since 2011. Coal in 2013 constituted less than 40 per cent of power production, down from 50 per cent in 2007. But the recent frigid winter has sent natural gas prices soaring, opening the door for coal-for-gas substitution – a reversal of the predominant pattern. According to the EIA, coal reserves at power plants have fallen below 60 days of “burn”, a level not seen since 2011. And just this week Consol Energy boosted its coal production target for 2014 slightly because of strong power demand.

The story remains grim for coking coal used in steel mills, though. Prices, at $125/tonne, are a third of 2008’s. The silver lining: compliant debt markets have given coking-heavy miners the leeway to wait for a recovery.

Email the Lex team in confidence at lex@ft.com

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