By Taylor Kuykendall

Coal producers and industry observers gathered at a Jan. 28 conference were in near universal agreement: There is too much coal in the market for current demand. As natural gas prices crush coal, fellow producers are causing the industry problems as well in the form of "zombie mines" and a spiral of low-price competition fueled by shedding liabilities in bankruptcy.

Robert Murray, CEO of Murray Energy Corp., opened the 16th Coaltrans USA conference in a keynote that lamented the effect that bankruptcy was having on coal companies, even those that are doing just fine financially. He said those producers, because they return with the same assets, but discarded liabilities without shedding any assets, are dragging the whole sector "down the bankruptcy sewer."

"Bankruptcies in coal spell only the death of corporate structures and not of the mines that failed to operate," Murray said. "This shakeout is also resulting in smaller, unlisted coal companies with minimal liabilities with which existing coal companies must compete with full debt and liability loads."

In an interview after his speech, Murray told SNL Energy that there is no easy solution. It is currently too expensive to close these mines due to bonds and debt, meaning even without profit, companies continue to operate.

"The crisis hasn't even started yet," Murray said.

Ted O'Brien, CEO of Doyle Trading Consultants, said that over the next three years, restructuring and consolidation will undoubtedly be a major trend. He projects that companies in Central Appalachia, for example, might opt to buy Alpha Natural Resources Inc. mines as the company proceeds through bankruptcy just to keep those mines shut. He said producers are going to continue to collect smaller companies, but industry needs more strategic buys, effectively consolidating the industry.

"What the U.S. market really needs to find balance is to embrace constructive consolidation," O'Brien said. "Constructive consolidation is, in my mind, acquisitions that result in supply cuts."

O'Brien said there is still a fairly fragmented market even though much of U.S. tonnage is produced by the top 25 coal producers; consolidation of the rest of the industry still provides opportunity.

"What we really need for a rightsizing of the industry is some dramatic change: some consolidation among the biggest producers to do the heavy lifting and take some tons out of the market," O'Brien said.

He said the next three years will be tough without radical change that takes significant tons off the market.

"The restructurings continue, but all that does is reset the cost base and give those operations a little bit longer to survive," O'Brien said. "At the end of the day, the industry needs some sort of radical change. The market will not bail out the coal industry this time."

He added that the only way the market could bail out the coal industry would be if there were a big change in natural gas prices, such as if regulations on that industry suddenly raised the price of coal's top competitor.

Sam Johnson, vice president of marketing and sales for CONSOL Energy Inc., said his company has been surviving the market by focusing on the things they can control: costs, supply discipline, optimizing schedules and more. He said CONSOL, an Appalachian coal producer, has been intensely studying and targeting which coal-fired power plants are going to survive new environmental regulations. He was asked by a panel moderator if CONSOL, increasingly depending on natural gas for its revenue, was exiting the coal business.

"We have been looking at how we best fit in this changing environment," he said. "Our coal assets still provide a huge amount of our revenue. That is going to stay that way for the foreseeable future."

One of the presentations before the coal conference was dismissed for lunch covered the basics of bankruptcy.

"I think we'll probably see 50, 60, 70% of U.S. coal capacity going through bankruptcy between 2012 and 2017," said an attorney with Davis Polk & Wardwell. "There's no way around it."