The Resurgence of the American Coal Industry
David Middleton / 6 hours ago April 6, 2017
Guest post by David Middleton
America’s Biggest Coal Miner Is Joining the Comeback Under Trumpby Tim Loh
April 3, 2017, 4:28 PM CDT April 4, 2017, 1:14 PM CDT
Peabody is following rival Arch Coal out of bankruptcy
The coal miner has for decades served as industry’s bellwether
Peabody Energy Corp., America’s largest coal miner, is back.
After almost a year in bankruptcy, the St. Louis-based giant began trading again on the New York Stock Exchange on Tuesday. Its return to Wall Street comes as the entire U.S. coal sector is staging a comeback amid growing interest from investors.
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Peabody’s relisting comes just months after rival Arch Coal Inc. emerged from bankruptcy. Miner Ramaco Resources Inc. held the industry’s first initial public offering in two years. And Warrior Met Coal LLC is planning its own. They’re all riding a rally in coal prices, which skyrocketed last year after China decided to cut its output. U.S. natural gas futures have meanwhile climbed, making coal a more attractive alternative for power generators, as Trump begins rolling back regulations on the industry in a bid to bring mining jobs back.
The industry’s recovering from a market collapse that, just a year ago, sent coal prices plunging to their lowest level in over a decade. The downturn forced shut hundreds of U.S. mines, leaving thousands out of work. Peabody, which produces more tons of coal than any other U.S. miner, is returning with about a quarter of its old debt levels and plans to focus on the thermal coal used by power plants — a fuel it can extract from mines in Wyoming and Australia that analysts including Clarksons Platou have ranked among the world’s lowest-cost operations.
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Kellow credited Trump’s initiatives, including an executive order repealing one of Barack Obama’s signature environmental measures, with affirming coal’s place in the nation’s energy mix. Eventually, policies out of Washington may delay or defer the expected closing of 50 gigawatts of coal-fired power plant capacity, Kellow said.
“A lot of the regulatory efforts that we’ve seen to date have focused on both job protection and laying the foundation for future growth in jobs,” Kellow said. “I mentioned the 50 gigawatts coming out of the system. The foundation is there to potentially delay or defer or turn that around. That would be the driver of jobs.”
Metallurgical coal rallied by the most in four years after damage from Tropical Cyclone Debbie hit shipments from Australia, the world’s largest producer of the steelmaking component. Spot prices rose 0.6 percent to $176.80 a metric ton Tuesday, after soaring 15 percent a day earlier, according to The Steel Index. Monday’s jump was the biggest daily gain in data going back to May 2013. Thermal coal gained 6.2 percent to $88.05 a ton on Monday.
Peabody may chart a conservative path forward, focusing on keeping debt levels low and staying profitable, Jeremy Sussman, an analyst at Clarksons, said in a note. That means avoiding decisions like a 2011 one to spend $4 billion to acquire Australia’s MacArthur Coal Ltd., an ill-timed, debt-fueled bet that metallurgical coal prices would stay high. Prices promptly crashed, ultimately driving Peabody into bankruptcy.
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U.S. coal production plunged by almost 40 percent under President Barack Obama as the industry faced competition from cheap gas and pressure from tighter regulations on pollution from power plants. Trump has already begun lifting regulations on the coal sector, including a ban on leasing on federal land. He promised during his campaign to bring back mining jobs, a prediction even coal companies have hedged.
“It’s not going to bring back jobs right away,” Robert Murray, the CEO of miner Murray Energy Corp., said of Trump’s initiatives in an interview last month.
Bloomberg
Of course the naysayers respond with:
“ Trump declares end to ‘war on coal,’ but utilities aren’t listening.“
“ Coal is on the way out at electric utilities, no matter what Trump says.“
But, they miss the point. The resurgence of the U.S. coal industry isn’t based on a resurgent domestic demand for coal as a power plant fuel.
Big Coal: Don’t Call It a ComebackBy Liam Denning
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Interviewed at Bloomberg headquarters on Tuesday, CEO Glenn Kellow, to his credit, didn’t try to spin a story of resurgent coal demand. Instead, his mantra is one of keeping costs down, taking opportunities to expand market share, keeping debt manageable and distributing cash to shareholders.
Peabody will also seek to reap the occasional windfall from more volatile international metallurgical coal prices via its Australian assets. In other words, blocking and tackling in a commodity market that is, by and large, not growing much and still facing big challenges.
One of the more telling moments during Tuesday’s interview came toward the beginning, when Kellow was summarizing the events around Peabody’s descent into chapter 11. He noted that, around the same time, U.S. natural gas prices hit a low of $1.67 per million BTUs. He was off by a few a cents — as he acknowledged he might be — at least according to Bloomberg data. Whatever; the point is that the CEO of a coal-mining company who quotes historical natural-gas prices down to the cent clearly knows the enemy.
As I’ve written here and here, the shale boom fracked the ground from underneath the U.S. coal sector. The industry simultaneously self-administered a coup de grâce in the form of ill-timed acquisitions, loading up with debt just as the market went south. President Barack Obama’s tightening of the regulatory screws on coal-fired power essentially closed the door on any revival.
The loosening of those screws doesn’t presage a coal renaissance. Which is why Kellow stresses the competitiveness of Peabody’s coal assets, particularly its mines in the Powder River and Illinois basins. These inland sources of supply enjoy lower costs than Appalachian coal, making them better able to compete with gas in the all-important power-generation sector.
In the chart below, I’ve calculated the price at which generic Powder River Basin coal can be competitive with gas at various price levels:
Those are theoretical numbers, but it’s clear what Peabody is up against. Natural gas futures over the next five years average just $2.97.
Kellow is optimistic the Clean Power Plan’s demise will keep some coal-fired units open that might otherwise have closed. He hopes this will also mean those remaining open will run for more hours every year, pushing utilization up from 50 percent or so to more like 70 percent.
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Bloomberg Gadfly
The resurgence is due to the industry making itself more competitive, in much the same manner that the shale oil & gas players made themselves more competitive in response to a collapse in commodities prices.
The Market for CoalThe demise of the Clean Power Plan (CPP) leads to a 30% increase in U.S. coal demand by 2030 (relative to the expected demand under the CPP):
Coal demand may not be resurgent in the U.S., but it continues to grow in the non-OECD world.
Chapter 4. Coal
Overview
In the IEO2016 Reference case, coal remains the second-largest energy source worldwide—behind petroleum and other liquids—until 2030. From 2030 through 2040, it is the third-largest energy source, behind both liquid fuels and natural gas. World coal consumption increases from 2012 to 2040 at an average rate of 0.6%/year, from 153 quadrillion Btu in 2012 to 169 quadrillion Btu in 2020 and to 180 quadrillion Btu in 2040.
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U.S. EIA
The coal industry can also take advantage of “climate change” (wink,wink, nudge, nudge):
After Cyclone Debbie, China replaces Australian coal with US cargoesTuesday, 4 Apr 2017 | 8:52 PM ET
China, the world’s biggest coking coal importer, is scrambling to cover Australian supply disruptions after Cyclone Debbie knocked out mines and rails by turning to an unusual source: the United States.
Debbie, which hit Australia‘s Queensland state last week, caused the evacuation of several mines and damaged coal trains supplying export terminals, triggering two miners – Yancoal Australia and QCoal – to declare force majeure on its deliveries. With other miners like BHP Billiton and Glencore also affected by the storm’s fallout, more disruptions may follow.
Force majeure is a commercial term that means a buyer or seller cannot fulfill their obligations because of outside forces. It is typically invoked after natural disasters or accidents.
Australia is the world’s biggest coking coal exporter and is China’s largest supplier. With markets there closed on Monday and Tuesday, its steel makers are clambering to find alternative supplies.
“Markets may be closed Monday and Tuesday but there’s certainly activity. The Chinese are fixing cargoes from the United States in order to replace the shortfall from Australia,” one coal trader with knowledge of the matter said, speaking on the condition of anonymity as he was not cleared to talk about commercial deals.
“More will make its way from the U.S. to China very soon,” he said.
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Reuters
China will remain a huge market for coal for a very long time:
China Ramps Up Coal Power Capacity As UN Climate Talks Kick OffMICHAEL BASTASCH
2:21 PM 11/07/2016
China’s government announced plans to increase the country’s coal-fired power capacity by as much as 20 percent over the next four years as United Nations delegates meet in Morocco to implement a major global warming agreement.
China’s new five-year plan would “raise coal-fired power capacity from around 900 gigawatts last year to as high as 1,100 gigawatts by 2020,” which is “more than the total power capacity of Canada,” according to The Wall Street Journal.
Officials said they would increase the percentage of its electricity mix it gets from non-fossil fuel sources to 15 percent by 2020. Coal’s share of electricity production would fall to 55 percent, down from more than 65 percent in recent years, though coal-fired power use could rise in absolute terms.
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