(Wyoming) — With the recent announcement that Arch Coal has filed for chapter 11 bankruptcy
Communities wondered how the company could reach a stage at which it would
be looking to erase $4.5 billion in debt from its balance sheet, while
Pitchengine reached out to Robert Godby, Director of the Center for Energy
Economics and Public Policy at the University of Wyoming, for an
"Arch finds itself in trouble because of investments they made in coal
mines in Appalachia and the purchase of a large coal mining company in 2011
called International Coal Group," Godby explained.
These assets produce coal for steel-making primarily, and the investment
was a bet on continued high growth in China, which would have created real
demand for this coal, Godby continued.
"When this did not occur, Arch found itself with considerable debt and no
revenues to cover the interest costs."
Combined with the currently unfavorable coal market due to low natural gas
prices undermining coal sales, to utilities and electricity generators, and
also some unfavorable pension decisions in the East, as well as new
environmental regulations that have undermined coal demand, Arch has been
unable to meet its debt obligations, resulting in the bankruptcy filing, he
"Overall – this is just another symptom of the general challenges in the
coal sector, and the difficulties coal producers will likely face in the
future as natural gas prices remain low due to the fracking boom, new
environmental regulations, especially those for greenhouse gases, and due
to slowing growth in Asian countries, particularly China," Godby explained.
The bankruptcy poses a potential problem for Wyoming and for other Arch
mines in terms of reclamation.
"The company clearly is in no position to honor its reclamation
responsibilities should it have to," Godby said, adding that in Appalachia
and other areas of the country, this could become an issue.
"In the Powder River Basin, this is less likely to be a problem as these
profitable mines will remain open and therefore not pose any immediate
reclamation liability. Further, were they to be sold the company taking
them over would likely have to assume the reclamation expenses," Godby said.
The bankruptcy may, however, highlight the risks of reclamation costs for
states like Wyoming in the long term, he said.
Colorado recently announced it was reconsidering self-bonding due to the
rash of recent bankruptcies in the industry, and the risks current
Wyoming may be forced to also reconsider its self-bonding practices in the
future, potentially raising such financing costs for any future operators,
"This could also undermine the general competitiveness of coal mining in
the longer term," Godby said.
Godby believes the bankruptcy could raise uncertainty for other mines Arch
owns elsewhere in the country, as such mines may be sold to other
interests, or they may be closed if they have more marginal profitability.
It could also slow development or expansions that were planned elsewhere.
"I think it also raises a lot of uncertainty about a potential shake-out in
the coal industry. The market is currently over-supplied, and desperate to
see prices increase if possible."
"This could be helped if some assets – Arch’s or others are permanently
closed and bankruptcies like this create that opportunity, if for example
takeovers and rationalization in the industry occurs. It is hard to say if
it will be Arch’s or other mines, but I think in the longer term you can
bet on mines closing across the country," Godby said.
Even then, however, this may not help as long as natural gas prices remain
low, he said.
Read more from Godby here .
*Feature photo abutyrin/Shutterstock / Pitchengine Communities*
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