Coal Prices Falling As Production Declines

For the first time in more than 30 years, the federal government has decided to hold off on authorizing new leases for coal mining on federal land. It will undertake a review to see whether taxpayers are getting a fair deal, while assessing the program’s environmental costs.

This welcome news is long overdue. Taxpayers have already lost out on $30 billion in revenue due to the undervaluation of coal mined from land belonging to the federal government. On top of that, Washington will soon be stuck monitoring and dealing with a growing number of abandoned coal mines.

This kind of obligation is becoming a bigger headache due to the string of bankruptcies rippling through the coal industry.

Arch Coal, the second-largest U.S. coal company, just filed for bankruptcy, joining 26 other companies since 2009. Energy experts tend to blame competition from cheaper natural gas and increasingly strict environmental regulations. But there are other factors at play.

Chief among them: These companies are suffocating under a mountain of debt.

Eventually, debt catches up with companies just as it will catch up with you.
Coal companies pushed it to the limit, all the while having taxpayers as a backstop. According to McKinsey & Company, the U.S. coal industry’s total liabilities were almost $100 billion by the end of 2014. It costs the industry almost $10 billion a year to service these liabilities. With U.S. coal prices falling as production declines, it’s not hard to see why they’re going bankrupt.

Coal’s excessive debt loads have created a vicious cycle: Companies are keeping money-losing mines open because it costs more in the short term to close them. That is, until the company files for bankruptcy—leaving taxpayers holding the bag. The feds are already working to clean up some 500,000 hazardous mining sites.

Federal law requires coal companies to post a reclamation bond (that is, insurance) to ensure funds are available to clean up a mine if the company can’t. But one of the options for reclamation bonds is a “self-bond,” which the company posts itself.

It’s as bad as it sounds.

If a company is deemed to be in good financial health, it can avoid putting up collateral or cash as insurance altogether. Now, with coal companies going bankrupt, these self-bonds have become taxpayer liabilities.

Alpha Natural Resources, for example, filed for bankruptcy last August, leaving taxpayers to cover more than $670 million in self-bonded liabilities. Arch Coal has $459 million in self-bonds and has asked the bankruptcy court to stick taxpayers with most of it.

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Author D Laidler

I am David, economist, originally from Britain, and studied in Germany and Canada. I am now living in the United States. I have a house in Ontario, but I actually never go.  I wrote some books about sovereign debt, and mortgage loans. I am currently retired and dedicate most of my time to fishing. There were many topics in personal finances that have currently changed and other that I have never published before. So now in Business Finance, I found the opportunity to do so. Please let me know in the comments section which are your thoughts. Thank you and have a happy reading.

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