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U.S. coal industry on board 'slow-motion train wreck'— report

Cecilia Jamasmie,, December 9, 2015

McKinsey and Co. warns the U.S. coal industry is not just facing overcapacity, but also crippling liabilities that will outlive mine closures.

It's been a dreadful year for the coal industry, particularly in the U.S., where nose-diving prices and tougher proposed regulation have pushed a number of producers to seek bankruptcy protection.

To avoid an even darker 2016, McKinsey and Company suggests the U.S. coal industry should get “smaller” and “healthier.”

The reason for this, as simply put by the analysts in a report published last month, is that while the US has plenty of coal, the world just “doesn’t need it”:

"By 2020, the convergence of low- cost shale-gas supply, environmental regulation, and waning international demand is likely to push demand for US coal to at least 20% below what US mines currently produce—which is already almost 20% below 2008 levels."

If this week’s climate-change summit in Paris succeeds in establishing firm goals for cutting emissions, coal’s future will be even darker. Years of pressure from climate activists are bearing fruit already, as a growing number of banks —including Morgan Stanley and Wells Fargo this week— are now pledging to cut financing to the industry.

That’s a problem it could sink the coal industry, as the sector is also facing crippling charges that will outlive mine closures, according to McKinsey and Co.’s report.

The analysts say that even if miners cut capacity to balance supply and demand in 2020, they still will be unable to service most of its approximately $70 billion of remaining debt and liabilities it has incurred over the years.

Just as an example, Alpha Natural Resources left behind more than $670 million in self-bond liabilities when it filed for bankruptcy in August, and officials have not determined how best to protect taxpayers from that hit.

A government’s program to subsidy coal mines clean-up, known as self-bonding, allows some of the country's largest coal companies to forego insurance on a share of future mine clean-up costs. However, authorities are now concerned the program could leave taxpayers with about $3.6 billion in self-bond liabilities, a U.S. Interior Department official told Reuters on Tuesday.

Closing mines does require large sums of money and could impair the ability of the companies to pay interest and return funds to bondholders. The result, says McKinsey and Co., is that the U.S. is now home to a collection of “zombie mines” that cannot turn a profit, but are too costly to close.

Click here for a copy of the report that includes further analysis and an action plan for coal miners in the U.S.