This devastation to workers, families, communities and corporations occurred even after Ormet had shuttered a smelter in Ohio in 2013, destroying 700 jobs and Century closed its Hawesville, Ky., smelter, killing 600 jobs, in August of 2015.
It all happened as demand for aluminum in the United States increased.
That doesn’t make sense until China’s role in this disaster is explained.
That role is the reason the Obama administration filed a complaint against China with the World Trade Organization (WTO) last week. In this case, the President must ignore the old adage about speaking softly. To preserve a vital American manufacturing capability against predatory conduct by a foreign power, the administration must speak loudly and carry a big aluminum bat.
The bottom line is this: American corporations and American workers can compete with any counterpart in the world and win. But when the contest is with a country itself, defeat is virtually assured.
In the case of aluminum, U.S. companies and workers are up against the entire country of China. That is because China is providing its aluminum industry with cheap loans from state-controlled banks and artificially low prices for critical manufacturing components and materials such as electricity, coal and alumina.
By doing that, China is subsidizing its aluminum industry. And that is fine if China wants to use its revenues to support its aluminum manufacturing or sustain employment – as long as all of the aluminum is sold within China. When state-subsidized products are sold overseas, they distort free market pricing. And that’s why they’re banned.
China agreed not to subsidize exports in order to get access to the WTO. But it has routinely and unabashedly flouted the rules on products ranging from tires to paper to steel to aluminum that it dumps on the American market, resulting in closed U.S. factories, killed U.S. jobs and bleak U.S. communities.
A former lobbyist for Peabody and past chairman of the World Coal Association, Palmer naturally believes that coal’s prospects have rekindled with the administration of President-elect Donald J. Trump and Asia’s future growth. He points to the 20% rise in shares of rival Arch Coal (ARCH) since its October emergence from bankruptcy (see also “Arch Coal’s Shares Could Catch Fire,” Dec. 3, 2016) as a foretaste of the windfall he thinks Peabody’s reorganization plan would give to his former colleagues in management and to the investors who’d become the company’s new owners—prominent among them, Elliott Management, Discovery Capital Management, and Aurelius Capital Management.
It’s not quite so clear whether Peabody’s postbankruptcy stock will taste sweet or like ash. The company didn’t respond to our queries and the hedge funds declined to comment. In recent weeks, the spot price for the coking coal used in metallurgy has receded 40%, and next quarter’s contract price will drop. Unsecured Peabody debt, which would convert into most of the new company’s equity under the reorganization plan, has traded down from 65 cents on the dollar to around 40. Expectations for Peabody’s resurgence have apparently cooled.
Peabody’s current stock has meanwhile returned from $16 to $4.92, leaving it with an equity market valuation of $91 million. Shareholders like Palmer will ask the bankruptcy judge to appoint a committee to represent them in Peabody’s proceeding. But even with an equity holders’ committee, it’s unlikely that the bankruptcy will leave anything for existing stockholders. In bankruptcy, creditors rule and most Peabody creditors have already agreed to support the plan that cancels the stock.
Before it sought bankruptcy protection last year, Peabody had been in the coal business for 133 years. Its stock market capitalization was around $20 billion in 2011 when it laid on debt to acquire the Australian metallurgical coal resources of Macarthur Coal to supplement its thermal coal business in the U.S. Thermal coal might sell for $50 a ton for the steam boilers of power plants, but scarcer coking coal shot above $250 a ton in 2008 and again in 2010–luring many coal companies to buy “met” coal resources.
UNFORTUNATELY FOR MINERS, prices for both kinds of coal started a multiyear slump in 2012. Thermal coal’s share of U.S. power generation fell from nearly 50% to 30% as natural gas became abundant and cheap, thanks to fracking. As shown in the chart above, met coal prices also sank as China mined more, but then decided to decelerate its steel output. Peabody shares dropped with coal’s price. Last April, Peabody started bankruptcy proceedings to reduce the more than $7 billion in debt owed by its U.S. companies. Although its mines were still cash flow positive, Peabody lost money in 2015 and said restructuring would let it ride out “the storm that has beset the coal industry.”
As disgruntled shareholders now point out, the storm soon passed. Not long after Peabody published an August 2016 business plan that forecast a price of just $95 a ton for met coal in 2017, market prices for both met and thermal coal staged a dramatic recovery. Benchmark contract prices for the largest steel mills rose to $200 for 2016’s fourth quarter—twice Peabody’s guidance–because of production bottlenecks in Australia and cutbacks Beijing imposed on miners. By December, the benchmark for 2017’s first quarter was set at $285 and spot pricing neared $300.
On Dec. 8, hedge fund Mangrove Partners asked the judge to give existing shareholders a seat at the table, arguing that resurgent coal prices lifted the miner’s cash flows sufficiently to raise Peabody’s enterprise value above the $7.8 billion owed creditors, leaving equity holders “in the money” if only they could get a piece of the reorganized business. Otherwise, Mangrove’s motion warned that Peabody’s creditors would get a windfall like the one yielded by Arch Coal’s bankruptcy. In July, Arch’s advisors estimated that the stock market value of a reorganized company wouldn’t exceed $666 million–but in October, Arch exited bankruptcy at a $1.5 billion market cap and is now valued near $2 billion.
Mangrove wouldn’t comment, but the equity holder’s concerns were shared in another court filing by a group of five fund managers who acquired Peabody debt that’s just above equity in the company’s capital structure.
Just before Christmas, the company filed its reorganization plan with the court. It took passing note of the rise in coal prices, and nudged up its forecast to an average of $135 a ton for met coal in 2017. Even so, the plan stipulated an enterprise value for Peabody of just $4.3 billion. Because that number is billions less than the company’s debt, the plan provides nothing for current stockholders. Instead of cash, the plan would give unsecured creditors like Elliott most of the stock in a new Peabody. Top management, which owned less than 1% of the current stock, stands to get up to 10% of the new shares.
Creditors have lined up behind the plan, to the disappointment of shareholders like Mark Gottlieb, a trader who notes that bondholders were offered deep discounts on the new Peabody’s stock if they quickly agreed to the plan.
Shareholders may fight about the value of the Peabody enterprise–as shareholders did last year in the contentious bankruptcy of zinc producer Horsehead Holding. The judge in that case gave careful consideration to the stockholders’ arguments. Then he approved the reorganization plan that wiped them out.