Dig Deeply To Find The Distressed Opportunities In Coal

Photo Credit: Mining GlobalEnergy continues to be a major area of focus for those of us who are interested in distressed investing. Although the oil and gas industries garner most of the attention, there are also opportunities in coal for those interested in challenging conventional thinking.

The coal producers, much like their counterparts in the oil and gas space, have been under stress, but to an even greater degree. Virtually every major coal producer in the U.S.—Arch Coal, Peabody Energy, Patriot Coal, Alpha Natural Resources, Walter Energy, and more—is now in bankruptcy.

There are two primary types of coal, based on their usage: thermal and metallurgical, and a couple of factors worked in tandem to bring the prices for both kinds to a peak in 2011.

Thermal coal is used for generating electricity and is a competitive fuel to natural gas. Both thermal coal and natural gas are used by utilities as fuel for generating electricity.  As the price of natural gas has come down, so has the price of thermal coal. However, not all electric utilities have the ability to switch between coal and natural gas and the cost of building new natural gas-fired plants is extraordinary.

Metallurgical coal is used to make steel.  A few years ago, there was what seemed like an insatiable demand for steel from China, which caused producers around the world to try to ramp up production. New metallurgical coal mines were dug in Australia, and American producers looked to expand by buying smaller mining operations.  Theyended up paying top-of-the-market prices for their acquisitions.

Then came the slowdown in the Chinese economy and a worldwide glut of excess steel. China set a goal of reducing its steel production by 45 million tons this year and coal capacity by 250 million tons, although by mid-August they had achieved less than half that goal. Local officials there have been reluctant to embrace the cuts, for fear of slowing growth even further and of unemployment.  Either way, commodity steel prices have dropped and so have metallurgical coal prices.

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