The US coal industry has weakened after taking the brunt of lower electricity demand and is highly vulnerable to resurgent coronavirus infections that could further reduce demand for coal in a downside scenario, says Moody's Investors Service.

The organisation expects weak second quarter earnings for coal producers.

"In 2020, demand for electricity has fallen sharply since March, largely because of the economic impact of the pandemic, and we expect that consumption of coal by the electric power sector will fall by more than 30% in 2020,” says Moody’s senior VP credit officer Benjamin Nelson.

Export prices have also deteriorated, which will translate into significantly lower thermal coal export volumes in 2020. Metallurgical coal prices and volumes are also under stress with the slowdown in the global steel industry.

“US coal producers, most of which have experienced at least one negative rating action in 2020 and many of which still benefit from decent liquidity, are highly vulnerable to further downgrades in such a downside scenario,” says Moody’s.

The agency took negative rating actions on most rated North American coal companies in the first half of 2020. It downgraded long-term ratings for Peabody Energy (B1 negative), Consol Energy (B2 negative), Contura Energy (Caa1 stable), and Foresight Energy, whose ratings were withdrawn.

Moody's has affirmed existing ratings, but revised outlooks to negative for Alliance Resource Operating Partners
(Ba3 negative) and Natural Resource Partners (B2 negative).

Only the low-cost, met-focused producers, such as Arch Resources (Ba3 stable) and Warrior Met Coal (B2 positive), have not experienced a recent downgrade to long-term ratings, nor an outlook revision.

Moody's forecasts that aggregate earnings before interest, taxes, depreciation and amortisation for rated producers will more than halve in 2020, with a modest recovery in 2021.

Considering the reduced earnings and diminished liquidity, an extended downturn would inflict more lasting
damage on the credit quality of the coal industry, Moody's says. Most US coal producers were already under strain before the pandemic and were weakly positioned since late 2019, it notes.

Meanwhile, the coronavirus pandemic will sharpen the focus on environmental, social and governance (ESG) risks, which are already affecting access to capital.

"ESG issues with respect to the US coal industry have tightened access to capital for companies in the sector, as a number of investors have signalled their aversion from coal-related holdings or signalled a willingness to punish coal companies."