Coal Earnings Will Be Constrained by Cost Increases, as Regs Stall New Plants

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Constraints to developing new coal mines include high capital costs, the need for sales contracts covering a high portion of new tonnage, and a lengthy permitting process, according to Fitch. While some producers are announcing new projects, the analysts noted that "these have more than two years lead-time and may only replace declining production at existing mines."

As U.S. coal producers benefit from tight global markets for both steam and metallurgical coals, Fitch Ratings cautioned that "high consumable prices and labor costs will constrain earnings growth over the new few months.

In the report, ‘Coal Outlook: Summer Burn, Supply Response', which was released by Fitch Wednesday, Monica Bonar, Director, Fitch Ratings, and analyst Sean Sexton noted that "mining in new or challenging regions can amplify already high maintenance and capital costs."

Constraints to developing new coal mines include high capital costs, the need for sales contracts covering a high portion of new tonnage, and a lengthy permitting process, according to Fitch. While some producers are announcing new projects, the analysts noted that "these have more than two years lead-time and may only replace declining production at existing mines."

While coal producers are benefiting from tight global markets for steam and metallurgical coal, regulatory uncertainty about carbon emissions has stalled plans for construction for many new coal plants, which Bonar and Sexton said, will cap domestic demand in the medium term.

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