February 5, 2019 - While U.S. coal producers are hesitant to invest in new capacity at the moment, several industry professionals said at a recent energy event that they do not foresee widespread consolidation any time soon.
Michael Bauersachs, president and CEO of Ramaco Resources Inc., said that in a “difficult environment” where the sector’s share prices are undervalued and investors are unwilling to take on debt, substantial mergers and acquisitions are unlikely.
“Now should it happen is a different question,” he said during a panel Jan. 31 at the 19th Coaltrans USA conference in Miami. “In particular on the steam side, I think you could make the case that substantial consolidation makes a lot of sense. It makes a lot of sense in the Powder River Basin because nobody is making any money at all there.”
Clarksons Platou Securities analyst Jeremy Sussman said boards are “uber sensitive to take on risk,” something he doesn’t foresee changing in 2019. Many investors were creditors who inherited their positions from coal bankruptcies, he said, and are not looking for growth at this point.
Banks also are hesitant to invest in capacity. While many banks refuse to fund thermal coal projects, “the vast majority will at least be willing to take a look at met coal,” Sussman told S&P Global Market Intelligence in an interview. “Compared to where it was when I began my career in 2006, it’s still a small fraction of what banks were willing to give out back then,” Sussman said. “Access to capital as a whole is still very, very tight.”
Jonathan Rose, head of the metals and mining Americas division at Deutsche Bank Securities, said recent mergers and acquisitions were “more situation-specific” and subsequent movements in the sector will be “relatively slow.” Further consolidation or acquisitions will likely occur because of specific opportunities rather than a wave across the industry, he said.
Consolidation will eventually be inevitable, Sussman said, because without investment in new capacity, supply growth will be “extremely limited.” He projects metallurgical coal pricing will remain well above the cost of marginal production for the foreseeable future, while thermal coal demand will continue to decline domestically.