Wednesday, April 13, 2016

Largest Coal Producer in Bankruptcy

The bankruptcy today of Peabody Energy, the world’s largest coal producer and a dominant force in international coal trading, was partly the result of the ongoing downsizing of the global steel industry. Since 2002, U.S.-based Peabody has made major acquisitions in Australia, mainly in metallurgical coal, and in the last two years these operations have failed to produce the profits needed to cover payments on the huge loans taken out to make the purchases. Much of the coal from eastern Australia was shipped to steel producers in China, but China’s steel production is being trimmed by a third in a government-led restructuring initiative, leaving Australian mines nearly idle. Steel production cuts are occurring elsewhere in the world at the same time. China was the least efficient global steel producer, using more coal to produce steel than any other country, so its cutbacks have a disproportionate effect on coal production. Peabody Energy coal mines are still operating during a restructuring process. The restructuring in bankruptcy could see the U.S. coal mines sold at auction.

Coal from Peabody Energy supplies 2 percent of the world’s electricity. One possible scenario is that electric utilities that operate coal-burning power plants could be forced to buy coal mines (at a low price, but still with considerable financial risk) in order to be sure that coal production continues.

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