By Olivia Kalb

March 27, 2020 - Moody's Investor Services expects further closures and bankruptcies within the US coal industry as demand declines significantly and environmental, social and governance concerns becomes stronger, the ratings agency Thursday.

"The combination of weak power fundamentals, challenging capital market conditions, and increasing concern about ESG will likely push a significant amount of coal capacity into bankruptcies and lead to new closure announcements over the next year or two," Moody's wrote.

Moody's expects domestic demand for thermal coal to decline in the near-term as much of the industrial economy is shut down in order to try and slow the coronavirus pandemic and as slower economic activity cuts down US electricity demand.

Additionally, Moody's "expect an unprecedented shock to the global economy in the first half of 2020," the report said.

"Before the intensification of the coronavirus pandemic in the US, we expected that coal production would fall by15%-20% in the US, to about 550 million st-600 million st," Moody's said. "We now expect that the industry conditions will worsen beyond this forecast" as demand weakens for electricity in the commercial and industrial markets.

While the outlook has particularly darkened recently for coal-fired power plants in the Mid-Atlantic and the Midwest, Moody's said, the coronavirus impact was seen in the Northeast by a 10% drop in electricity demand.

Coal plants have been economically challenged for the past few years, generating minimal to negative cash flows.

"The developments in the past few months have conspired to push them into an even more perilous position," Moody's said.

On the export side, as well, demand for US thermal coal has declined significantly over the past year, leaving producers with declined domestic and seaborne demand.

"Export thermal markets will continue to fall in 2020, rather than helping rescue domestic thermal coal producers from weakening domestic demand like in 2017 and 2018," Moody's said. "While some producers still have contracts established during stronger market conditions, and cash costs vary significantly for each mining operation, coal pricing in Europe will not support a continuation of US exports at 2019 levels, which were themselves down 20% from 2018 levels."

Moody's noted some producers may have advantages, such as Alliance Resource Operating Partners, in competitive cash costs, modest debt leverage and enough free cash flow generation to cushion the blow of lower prices.

"By contrast, CONSOL Energy, which has reduced debt aggressively since becoming an independent company in 2017, is more leveraged financially with less anticipated cash flow to reduce debt," it said.

Along with the coronavirus, the coal industry has been challenged by ESG-related issues eroding capital for US coal companies.

"Equity and debt trading levels for coal companies have worsened substantially from a trifecta of factors: a weakening export market in the second half of 2019, multiple announcements that major investors would divest coal-related holdings, and the broader weakening that occurred with the global spread of the coronavirus in March 2020," Moody's said.

While Arch Coal and Alliance have recently obtained new financing in 2020, Moody's said, largely access to capital remains tight in the industry and the pandemic only adds to uncertainty.

Additionally, government assistance during the pandemic remains uncertain, following the National Mining Association's letter to Congress requesting relief measures.