Alexx Sanchez
asanch16@uwyo.edu
Peabody Energy, the world’s largest privately owned coal company, filed for Chapter 11 protection after the price of coal took a downturn.
After Arch Coal and Alpha Natural Resources also declared bankruptcy, Dr. Robert Godby, director for UW energy economics and public policy center, said it was inevitable for Peabody Energy to declare as well.
According to United States Courts, Chapter 11 bankruptcy allows a company to reorganize its business to keep the company running and allow it to pay off its creditors over time.
In Peabody Energy’s case, the company invested billions of dollars in borrowed assets to purchase metallurgic and thermal coalmines in Australia, Godby said.
“The problem that Peabody, Alpha and Arch faced is that all three companies in 2011 made very large investments which they did on borrowed money to purchase metallurgical mines,” Godby said.
Godby said the reason these companies invested money in purchasing the mines was because each of the companies thought Chinese growth would continue unabated. They thought China would need more building materials, such as steel, which is made from metallurgical coal.
Therefore, coal companies like Peabody would be able to export the coal to China and to other expanding markets in Southeast Asia.
Unfortunately, the assumption that China would never stop growing was untrue and China’s growth has slowed down significantly, Godby said.
“Even at the time, this was somewhat controversial, but coal companies were full speed ahead,” Godby said. “Certainly, the creditors who lent them the money believed their story that it was a good idea. A lot of people were concerned that the growth couldn’t continue.”
In conjunction with the bust in China’s demand for coal, the U.S. coal market has also seen a decline in demand after a rise in natural gas supply and a mild winter.
Peabody Energy has already made layoffs in Wyoming. In March, the company had a press release stating 235 hourly and salary employees were let go from its North Antelope Rochelle Mine in the Powder River Basin.
According to the press release, Peabody President for the Americas, Kemal Williamson, said, “While our asset position and contracting strategies give us relative strength, we are taking these actions to match production with customer demand.”
Kemal also said Peabody Energy regrets the impact the layoffs have on their company’s employees and their families along with the surrounding communities in the Campbell and Converse county areas.
Godby said he does not expect Peabody to make additional layoffs due to the bankruptcy because the mines in Wyoming are some of the most competitive and profitable in the country.
In other words, the mines can still make money.
According to Peabody’s press release, in comparison to other coal basin regions, the Powder River Basin is faring better due to cost advantages.
Since Peabody Energy has filed for Chapter 11 protection, the company said it is able to continue normal operations, such as maintaining its existing bank accounts, pay its employees their normal wage and healthcare and reimburse employee expenses. However, none of the Australian companies that Peabody Energy purchased are included in the Chapter 11 filing.
From the April 14 press release, Peabody President and CEO, Glenn Kellow said, “We are pleased with this first positive step forward in our Chapter 11 process, and the support we have received since our filing from our employees, customers, suppliers and many other stakeholders has been highly encouraging.”
Even though the bankruptcy should not hurt Peabody Energy, the direction the coal market takes will be the defining factor of the company’s future success, Godby said.
He added that he believes the coal industry could be downsized in the future as other cheaper forms of energy come into play and as reductions of carbon emissions requires cleaner energy technology to be put into place.
In the meantime, Godby said the projection for the coal industry in 2016 is down 17 percent, but there will not be a change in 2017.
