Coal sector consolidation?

Inland Insider

Coal sector consolidation?

By Kevin Horn

Most of the small, local banks have been gobbled up, becoming part of large regional or national banks. Will the same scenario emerge in the coal sector?

In response to shortages and a hedge against rising prices, there has been a global movement in the raw materials markets toward consolidation. A big exception is the U.S. coal market. For the most part, traditional Eastern U.S. coal production has remained under the fragmented control of independent producers. There is an abundance of coal reserves and producers in the region, which has resulted in high inventories and downward pressure on prices. As a result, coal prices have had trouble keeping up with rising costs, particularly those related to energy and safety.

The traditional barge-dependent coal sector has not generally been regarded as an attractive takeover target. Industry asset valuations remain high relative to earnings. There is also uncertainty revolving around future coal demand as a result of environmental concerns. Recent negative publicity over mine safety has also had an impact on the industry and any potential new investment.

There is some evidence, however, that the U.S. coal sector could be in store for some regional consolidation to cut costs. The future of the industry will likely rely on sustained higher prices that can only result from consolidation.

Coal remains an important source of U.S. energy and an important cargo for the barge industry. But growth will likely be slow unless the industry can improve profit margins through aggressive cost control. The most likely way for that to occur is through mergers and acquisitions. Growth is possible, but it will come at the expense of competition. The current fragmented market will only continue its lackluster performance and growth.

Eastern coal offers a mixed message for the barge industry. The barge sector is particularly vulnerable to coal industry consolidation that will result in fewer larger companies with a strong regional presence. For the barge industry, however, a leaner coal industry is preferable to the existing traditional coal sector that is plagued by high costs.

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