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Moody's Unpacks its Rationale for Low Coal Producer Credit Ratings



By Marleny Arnoldi

July 9, 2021 - Social opposition to coal production is leaving coal assets increasingly concentrated among companies that specialise in coal, rather than diversified groups, says Moody’s Investors Service.

The credit rating company says larger mining companies are divesting from coal-related assets, while pure-play coal companies are having weaker credit quality, while demand is fading in some markets.

“All pure-play coal companies are rated below investment grade today,” Moody’s explains, adding that thermal coal faces more social risk than metallurgical coal – which is used in steelmaking.

Moody’s explains that metallurgical coal faces less government pressure and the steel industry will have a hard time transitioning away from coal.

Coal is at a higher risk than ever with access to capital diminishing and changing societal preferences. Even a projected rebound in thermal coal demand in the US this year will be short-lived, notes Moody’s, considering that coal demand in the US is in a long-term secular decline, along with demand in Asia-Pacific.

The investor service says despite coal producers’ strong credit metrics during much of the commodity cycle, Moody’s has maintained their low ratings largely because of the sector’s declining secular demand.

It generally has stronger ratings for other diversified mining companies that hold some coal assets.

Government policies are cutting coal demand in certain regions, while natural gas has become cheaper, with prices likely to stay low by historical standards for the foreseeable future.

Natural gas, which burns far more cleanly than coal or oil, also benefits from a more favourable regulatory environment in some regions.

Renewable energy, another coal competitor, benefits from government subsidies in some regions and improving economics in general.

Meanwhile, social opposition makes it more difficult for public companies to own coal assets, and especially difficult to make new investments in coal assets.

Demand and social factors are not the only risks coal producers are facing. Health and safety issues associated with coal mining will remain a significant hazard.

“Coal mining is still a dangerous occupation with notable regional differences.

“We categorise the sector’s health and safety risk as very high because of high-profile safety-related issues such as mine collapses and fires, as well as health-related issues such as black lung disease that can create cash outflows and longer-term uncertainties,” the ratings agency says.

Moody’s adds that carbon-intensive industrial sectors such as coal often exhibit high exposure to responsible production issues. The company considers responsible production risk as being high for the coal industry, which must contend with such social risks as waste disposal and local community relations, on top of environmental risks such as carbon emissions.

This while the coal industry faces increasing risks related to human capital. Particularly in North America, the coal industry must grapple with aging workforces, union disputes and the difficulty of recruiting skilled workers.

A number of unfavourable conditions within the industry are encouraging capable workers to rather seek employment elsewhere.

Moody’s had taken negative rating actions in 2020 for most of the rated coal producers in North America, with limited improvement in 2021.

As with many other hard-hit industries, US coal producers responded to the global outbreak of Covid-19 and a severe reduction in demand by seeking flexibility under existing financial arrangements and obtaining new financing.

Some prominent investors have restricted or eliminated their investments in the coal industry – especially for thermal coal, a fuel source with stiff competition, contributing to that industry’s long-term credit risks.

There were no new unsecured bond deals or secured term loan deals for any rated pure-play US coal producers in 2020.

Instead, some companies amended existing facilities while others tapped other markets for financing, such as convertible and tax-exempt debt.

Expectations for higher coal consumption this year reflect an economic recovery from the global pandemic, and do not alter the longer-term trend.

In fact, Moody’s expects the transition away from coal-fired power generation to accelerate as a result of Covid-19, hastening the demise of already troubled coal-fired power plants and encouraging power generators to switch permanently to natural gas and other fuel sources.