In its latest circular, Asia-Pacific miners hold the edge, but long-term challenges remain significant (May 31, 2024), Moody’s Ratings makes some short-term predictions about the future for coal operators by region.
The firm highlighted that business conditions are more difficult for North American miners than for APAC miners. Many strengthened credit quality by repaying debt during a period of high coal prices, which has created a buffer against lower earnings as coal prices decline. However, North American miners are disadvantaged compared with the APAC miners, because of a faster decline in domestic coal demand, greater regulatory risks and more limited external funding options.
Moody’s believes that demand decline will be more rapid in North America than in APAC. The International Energy Agency’s STEPS scenario, which they use as their baseline scenario, forecasts coal demand in APAC will remain relatively stable through 2030. By contrast, it projects demand will decline significantly in North America during this period, as natural gas, together with the buildout of renewable energy sources, continues to diminish domestic demand for thermal coal.
APAC miners’ pursuit of diversification better positions them to preserve long-term credit quality but comes with risks, the firm explained. Amid the global drive to decarbonize, a failure to diversify could significantly weaken miners’ credit quality over the next 10 years. Still, diversification will raise miners’ execution risk given their limited track record in operating non-coal businesses. North American coal miners are less likely to diversify outside of coal because of limited shareholder support and will instead use excess cash for shareholder returns.
Exposure to social risks is greater for North American coal miners, according to Moody’s. Demographics and societal trends will weigh on the credit quality of all coal producers because of social pressures relating to the use of fossil fuels, driven by concerns over climate change. However, the policy agenda is immediate in North America and more stringent government regulation is reducing coal demand more substantially compared with APAC.
The firm also believes that APAC coal miners benefit from broader funding access. They say the coal operators they follow in Indonesia and China enjoy access to domestic banks, which have continued to lend to the sector in the last one to two years amid high coal prices and the importance of coal in these countries’ power generation mix. By contrast, North American coal miners have had to resort to alternative, short-term financing because of investor reluctance to fund coal companies. They also face substantial long-term financial obligations around mine rehabilitation liabilities and workers’ compensation.
A copy of the report can be found at Moodys.com.
Moody’s made some short-term forecasts regarding North American and APAC coal operators partially based on the International Energy Agency’s STEPS scenario. (Source Moody’s)
