The vast majority of recent M&A activity in the coal sector has been focused on Australia and Indonesia owing to the increasing energy needs of China and India as well as the need for further industry consolidation.

However, analysis by Wood Mackenzie indicates a global shift in activity towards the US.

Analysis shows the total number of deals completed this year is comparable to the previous 12 months; however the disclosed acquisition spend is down 16% from 2009 levels - at US$10.9 billion.

Wood Mackenzie head of coal supply research Gero Farruggio says the vast majority of M&A activity has been focused in Australia and Indonesia. There has been 27 deals in 2010 to date, compared to 25 in 2009, with single asset transactions accounting for 15 deals - up 50% on 2009 levels.

“The US is the global hotspot for corporate deals in the coal sector. Total disclosed US corporate consolidation spend has been US$2.3 billion in 2010, compared to US$4.2 billion in 2009 - all on metallurgical coal resources.”

While there is much room for growth in both the US and Asia, there are also considerable risks that could limit M&A activity.

“The biggest risk stems from uncertainties in the political and regulatory environment, which could greatly slow operations and investment.  Examples include the inability to obtain permits in the US and the Australian resource tax debate.”

Wood Mackenzie has forecast a positive outlook for coal M&A in 2011.

Gero Farruggio says, “In the US, there are two main areas of opportunity for activity in coal resource acquisitions.  The first is further consolidation of thermal and metallurgical producers. Since the US coal supply sector is mature, this play provides the only real avenue for material domestic growth.

“The second growth area is a continuation of the trend of overseas steel mills looking to vertically integrate. In terms of deal value, this can exceed Australia and Indonesia where most of the activity will be at the asset level. The question here is in the future, will the largest producer of US metallurgical coal be a US company?

“Another key question remains: is coal central to Big Coal's growth strategy? The more diversified miners may decide it isn't or rather focus on metallurgical or thermal coal to strengthen the core business.  Premium prices for assets may trigger an exit strategy, presenting a growth opportunity of scale for a peer.

“While these questions are yet to be answered, one thing is clear from our analysis: the US has the potential to become a hotbed of corporate activity, and lead a revival in coal M&A.”