Coal.....

Water Cooler Investing
#21

How much longer can coal prices continue their downward spiral? The KOL ETF seems destined for $0 and some of the major US producers Debt instruments are selling off heavily.

Coal, oil, base metals (copper, aluminum, zinc, lead), gold uranium are all severly depressed. How long of a lead time does the market need before supply is drastically reduced (base metal stocks at all tiem highs)? 5-10 years, any guesses?

#22

Are you talking met or thermal?

Either way, the short answer is prepare for a long wait.

Slow demand in China and a weak domestic economy means lot of supply being exported at loss making levels. You’ve seen how resolute the government is to avoid a slowdown, they’re gonna prop up the industries they have.

Here’s some bullets from a writeup I put together on a met coal provider the other day that sum up the situation well (met coal + iron ore = steel) for background.

Steel Market

  • Chinese annual crude steel consumption in 2014 declined 3.4% from the prior year, the first decline in three decades. The China Iron and Steel Association (CISA) did not forecast any significant recovery for 2015.
  • Chinese crude steel consumption in May was down 2.9% month over month (SA), while year to date consumption is down 4.9% versus the prior year, reflecting an accelerating decline.
  • To maintain capacity utilization rates, net steel exports increased 7.5% over the prior month (SA) and 33% year to date. Protectionist responses have already reduced US steel imports by 6.2% over the prior month in May, and estimates that ~70% of Chinese steel mills are loss making point towards a period of supply rationalization. Seaborne steel can serve as a virtual coal export.
  • Elsewhere, Brazilian steel demand is falling at an accelerating rate demonstrated by May’s 32% decline versus the prior year, bringing year to date volumes down 14%.
  • In the US, the demand picture is the most favorable among major regions, yet shipments are still down versus the prior year, with quarter to date shipments down 11%. US inventories are returning to normalization, having fallen 1.5% in May, but remain up 11% versus the prior year.

Metallurgical Coal Market:

  • Significant investments by BHP into new, low cost capacity and slacking demand have pushed the market into oversupply. Significant cost reduction measures have flattened the cost curve among producers and delayed production cuts.
  • Analyst estimates for met coal pricing generally fall around $96 /t through 2015 and $100 /t in 2016. Revisions have been decidedly negative over the past year with contract pricing continuing decline.
  • With domestic demand falling, [SS Bank] indicates China has shifted to a net exporter of met coal as imports are down 35% year to date mirrored by surging exports.
  • XYZ’s management indicated in March 2015 that approximately 45 million tons of supply must be closed to restore balance to the market, net of 15 million tons of shuttered supply in 2014 (9 million tons realized). XYZ and ABC each closed 1.5 million tons of capacity in June, leaving a significant remaining supply gap. As the marginal supplier to Asia, North American producers will bear the majority of cuts. The issue is exacerbated by lengthy delays ranging from six months to one year required to actually halt production.
#23

Another thing you’re missing is that on the thermal side, not only is it being regulated out of the US, with nat gas electicity production recently passing coal for the first time and the Chinese still filling their own supply and moving to an exporter… but in the US, many of the utilities have been stockpiling coal they acquired through take or pay contracts but burning natural gas while it’s cheap, a similar thing happened during the last dip in 2012 where demand was suppressed the following year on low order activity as utilities worked through the stockpiles they’d built up. So if you’re looking for a 2015 or 2016 recovery, it may not be on the way.

#24

^ good stuff BS, thanks for sharing

The bonds on BTU look tempting but I question their ability to survive this downturn.

#25

I know for ACI, unsecured recovery value is supposed to be in the $0-10 range and they’re basically entering restructuring now on the 20’s which will alleviate some covenants and allow them to hose everyone else. I mean they’re gonna be stuck selling assets that aren’t worth much via firesale into a tight liquidity market.

#26

Any opinion on uranium?

#27

I wish I had something for you but I’m still getting up to speed in the space and honestly your view on uranium is as good as mine right now. As I get a better handle on it I’ll message you or something.

#28

jfc, I didn’t realize Peabody’s debt was trading so terribly. I see $0.38 on the dollar for a 2018 maturity. It seems like just yesterday this was nearly an investment grade credit. I don’t follow the coal industry so I don’t know much about their asset quality but man the markets are crushing Peabody. They used to be the cleanest dirty shirt…now the coal industry is just all dirty shirts?

#29

Those coal positions must hurt.

#30

http://www.bloomberg.com/news/articles/2015-07-31/the-600-million-mine-sold-for-a-dollar-underscores-ruin-of-coal

#31

Stinging a bit. I’m in on some Peadbody debt, 2026 7.875, low 30s basis, 27 today. May buy more. Waiting for Black Swan to give it the all clear. He’ll update us on Oct. 29 if he is still planning on checking back in six months from the end of April. I’m not holding my breath. lol

#32

You are so screwed.

#33

Would you be interested at 10 cents? There has to be a price…

#34

As a principle, there doesn’t have to be.

  1. I don’t want to wait through two years of bankruptcy court to get a fair return when I can look at areas like gold that have a much clearer path to a strong postive return and 2) if they went into bankruptcy they’d be selling assets into a market that is oversupplied at near zero valuation with no buyer liquidity. Literally every potential buyer is either in a liquidity crisis or not looking to add coal exposure and you have a large senior secured debt load.

As an example, recovery value on Arch’s unsecured’s could be as low as zero and there’s research out there stating as much. Now, BTU’s is unlikely to be zero, but if it was $10, you’d be waiting two years to realize a potentially huge loss or selling at a haircut. I think people are leaning towards a simple debt restructuring as the likely outcome for BTU, so you probably don’t have to worry about that, but I also think the market is still underpricing the risk in China so you will very likely realize a further negative return on that bond.

#35

the big problem with debt attached to negative cash flow mines is that in order to keep the mine on standby (i.e. ready to produce with a few months of more favourable commodity prices), you have to spend a lot on care and maintenance. every day that a mine doesn’t produce but is on standby erodes any capital remaining in the company’s coffers. the alternative is to shut in the mine and save the ongoing costs. the problem with this option is that it will require a boatload of re-start capital to get it up to snuff when you do want to start producing again, which likely means a capital raise and meaningful dilution. most companies will stay on “care and maintenance” and pray for price recovery until they die as shutting a mine in is a near certain death sentence for current shareholders. if you’re in the debt of the company, boatloads of capital will be wasted in trying to keep the mine going for as long as possible, and the equity you receive in the reorg will likely be eroded over and over again until there is nothing left. you cannot treat mine debt as debt backed by an asset as it is not an asset if it is cash flow negative, it is a liability.

#36

Maybe for the debt holders not the equity holders.

#37

Yuan devaluation could see China become a coal exporter

http://www.timeslive.co.za/sundaytimes/businesstimes/2015/08/13/Yuan-devaluation-could-see-China-become-a-coal-exporter

#38

Good points.

I’ll add the natural gas E&P companies in the Marcellus/Utica near the Appalachian coal have been getting very impressive drilling results on nat gas wells (they seem to keep getting better and better). I think the Marcellus/Utica is a world-class nat gas asset. There’s a lot of problems with nat gas in that area, but the coal in the region is going to be competing very low cost nat gas production for years to come, so I don’t think that price recovery is going to happen. Those nat gas E&P’s in the area have a large drilling inventory, particularly with the emergence of the Utica formation. I can’t imagine those coal assets in the area have any value, particularly considering the points Matt brought up. Strong case can be made they are liabilities – agreed.

#39

Where do the workers go when a mine is put on care and matinenace?

#40

This highlights some of what we’re saying.

http://www.bloomberg.com/news/articles/2015-07-31/the-600-million-mine-sold-for-a-dollar-underscores-ruin-of-coal