A bloodbath in the coal business

The coal industry is falling apart. This week Peabody Energy (US:BTU), the world’s biggest private coal company, filed for bankruptcy.

The coal industry is falling apart.

This week Peabody Energy (US:BTU), the world’s biggest private coal company, filed for bankruptcy. It follows Arch Coal, Patriot Coal, Walter Energy and Alpha Natural Resources into chapter 11 in the last two years.

Peabody may not be a household name, but it’s a big important business. Ten years ago, it provided half of the United States’ electricity. Back then it was worth around £10 billion. It was confident enough in 2011 to drop $5.1bn on McArthur Coal, an Australian coal company that was making a packet selling special metallurgical coal to the Chinese market.

You can see why Peabody would’ve felt confident at the time. Coal power plants have always been the workhorses of the electricity industry. China was getting into coal in a big way. And Peabody had been a giant in the industry for about a hundred years.

That was then, this is now. Read on to learn how bad things have gotten.

Workhorse bloodbath

As I said, coal power plants have been the workhorses of the energy industry – especially in Peabody’s home market of the US. In 2003 there were 629 coal plants in the US, supplying half the country’s power. Last year, there were only 491 plants left. In 2008 the industry produced 1.2 billion tonnes of coal, in 2015 that was down to just 750 million tonnes.

What’s behind the fall? Mainly natural gas. In America, fracking has brought lots of natural gas on stream. The “Henry hub” spot price of natural gas has fallen from around $8 per million BTU in 2008 to around $2 today. At that price, natural gas is cheaper than coal. And it’s greener.

That’s the other big problem for coal: it’s very dirty. It’s the most carbon-intensive fuel of them all, responsible for 40% of the world’s carbon emissions. Back in Peabody’s heyday that wasn’t a big problem. Nobody gave a hoot about carbon emissions in George Bush’s America. But times and thinking have changed.

Even the US is about to sign up to January’s Paris Climate Agreement. International organisations like the International Bank for Reconstruction and Development, the US government, and commercial banks like JP Morgan Chase and Bank of America won’t finance any more coal plants.

Peabody was betting that the rise of China would offset shrinking demand at home. But that hasn’t worked at all. Along with the steel industry, demand for coal has crashed in China. Demand was growing by 10% per year for the decade to 2012, when Peabody made its big bet. Then growth stopped all of a sudden in 2013/14. And last year, it fell by 4%. As much as anything, Peabody’s big $5.1bn bet on Chinese demand has sunk the company.

So what’s next for coal? Well around 30% of America’s power stations are coal-powered. That number is shrinking, but it’s still a lot of coal. Someone’s going to have to supply it. When Peabody (and Arch Coal, and Patriot Coal, and Walter Energy and Alpha Natural Resources) come out of the bankruptcy process you’d imagine most of their assets and their employees will still be employed.

As it stands Peabody owes its creditors $6bn. The creditors will know what’s coming next – they’re going to be offered equity in the business in exchange for writing off their debt. It’s a crappy deal for them, but it’s the best they’re going to get.

Where the money’s going

Of course, coal isn’t collapsing because people are demanding less electricity overall. What’s happening is that other sources such as natural gas and renewables are taking over the market.

You’ll have heard plenty about fracking over the last few years. Natural gas has definitely been the biggest beneficiary (or should that be instigator?) of the collapse in the coal business.

But renewables are playing a big part too. Last Saturday in the Saturday morning reads email I sent an article which included a remarkable statistic: solar power has doubled its market share seven times in the last 15 years. It only has a roughly 1% market share. But if it keeps on doubling…

The following chart shows the money being invested in each category of power generation.

rar1504

Renewables might have a tiny market share. But they’re where the money is going.

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