Four of the largest U.S. coal producers made $20 billion in acquisitions last year to reduce their dependence on the domestic power industry. Instead, those deals have added to the companies’ pain.
Alpha Natural Resources Inc., Peabody Energy Corp., Arch Coal Inc. and Walter Energy Inc. completed takeovers that boosted sales of metallurgical coal used in steelmaking. The companies bet that the coal, which sells for a higher price than the thermal variety burned to generate electricity, would benefit from booming Asian demand and counter threats from falling natural-gas prices and extra environmental regulation.
That strategy isn’t working out. Prices for metallurgical coal, which has been forecast by JP- Morgan Chase & Co. in November to jump 50 percent in 2012, have fallen 16 percent this year amid slowing steel output in China and Europe. That could mean the U.S. coal industry, which has already seen the bankruptcy of Patriot Coal Corp. in July, will continue to burn through free cash for another year.
“There was some belief that there was counter- cyclicality between met and thermal,” said David Gagliano, an analyst at Barclays Plc in New York. “What we’ve learned is that they aren’t that different.”
U.S. coal producers have been closing mines and firing workers this year as some power plants switch from coal to gas, which is trading close to a decade-low amid booming output from shale rock.
Alpha’s 70 percent drop in 2012 makes it the worst performer on the 29- member Stowe Global Coal Index, which lost 31 percent in the period. Arch is down 57 percent, and Peabody has declined 32 percent in the period.
Domestic coal output in 2012 will fall 7.4 percent, or by 81 million tons, according to data from the U.S. Energy Information Administration.
Prices for Central Appalachian thermal coal, the U.S. benchmark, have declined 16 percent in the past year to about $58 a ton on the New York Mercantile Exchange.
“It’s hard for us to imagine them getting much worse,” Mark Levin, an analyst at BB&T Capital Markets in Richmond, Va., said in an Aug. 21 note.
Low-volatility metallurgical-coal prices are down 34 percent over the last 12 months to $192.50 a ton, according to data from Energy Publishing Inc. China, the second-largest economy and biggest steel maker, expanded 7.6 percent in the second quarter, the slowest pace in three years. Domestic steel prices are at their lowest in more than two years.