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Moody's offers grim outlook for coal with little hope for near-term recovery

Moody's has reiterated a grim outlook for the coal industry,suggesting that recovery is unlikely for several years.

"The North American coalindustry has undergone a severe long-term structural shift," said Moody's seniorcredit analyst Anna Zubets-Anderson in a May 6 research note. "Our view isthat material recovery for U.S. thermal or seaborne metallurgical coal is unlikelyover the next several years."

The agency's report stated thatthe combined EBITDA for the industry will drop by more than 10% over the next 12to 18 months for these coal markets, during which time the seaborne coal marketswould likely continue to face weak prices and oversupply.

In the meantime, the U.S. thermalcoal industry faces challenges from low natural gas prices and regulatory pressure.Moody analysts said coal consumption would decrease by 4% in 2016 and productionwould drop by 12% as utilities worked through "unusually high inventories."They predict the coal share of the total U.S. fuel supply to slip to the mid-20%range within the next 10 years.

Moody's placed nine coal companiesout of 55 mining industry companies rated between A1 and B3 under review for downgradeon Jan. 21 under the belief that the industry has suffered from a long-term structuraldecline with slim chance of recovery in the near future.

While Moody's expects an increasednumber of mines to close as major producers reorganize through Chapter 11 bankruptcy,it believes this will lead to more consolidation with "better cost structuresand lower leverage." They said that larger, diversified companies would havean advantage over smaller coal companies if the latter has more conservative balancesheets after restructuring.

"Most of the major U.S. coal producers have filed for Chapter11 bankruptcy protection over the last two years and the remaining companies aremostly differentiated by niche markets, good contracted positions, or a differentbusiness model," Zubets-Anderson said. "Still, even those ratings remainlow reflecting the overall industry headwinds."

Zubets-Anderson recently S&P Global Market Intelligencethat those U.S. coal producers that have avoided bankruptcy also face challengesfrom companies that restructure with leaner operating costs and relieved debt burdens.Companies that avoided going under may be at a disadvantage as a result.

Overall, North American coal companieshave dropped from an average B2 rating in the beginning of 2014 to an average Caa3rating by March 2016, according to Moody's.