The Death of American Coal Producers — and a Potential Lifeline
Last Monday saw reports that Patriot Coal will seek bankruptcy protection. This pulled down the share prices of competitors like Peabody Energy, Arch Coal, and Alpha Natural Resources.
As much as the coal producers claim that this is because of an Obama Administration “War on Coal,” it’s more about market realities . As the price of natural gas has fallen to below $3.00 per MMBtu, due to the growth in domestic production of gas from the shale gas boom, it is mostly cheap gas that is undermining coal demand. Therefore, the coal industry should not expect the outcome in this year’s Presidential election to provide much relief.
However, the recently-finalized EPA rulemaking on Mercury and Air Toxics Standards (which the Senate failed to overturn in June by a vote of 46-53) and the June Supreme Court decision that validated the EPA’s authority to regulate greenhouse gas emissions will put the nails in the coal industry’s coffin.
There are two important things to note here as the coal industry falls on hard times. First, coal mined in the East (especially Pennsylvania, West Virginia, and Kentucky) is generally inferior in terms of purity and, especially, sulfur content to coal mined in Wyoming’s Powder River Basin. Eastern coal has relied on nearby markets consisting of older, less efficient coal power plants. The newer, more efficient plants, using ‘Supercritical’ and ‘Ultrasupercritical’ technology tend to be in the West and utilize the cleaner Powder River Basin coal.
Second, while the domestic market for coal is collapsing, there remains robust global demand for coal, especially in East Asia and India. Up to now, the only major coal shipment ports are on the East Coast, and coal cannot be exported from the West Coast in sufficient quantities. Shipping a bulky, low-margin commodity like coal from the East Coast to Asia through the Panama Canal is neither cost effective, nor is there sufficient shipping volume available to do it. However, on the West Coast, where large vessels often make the return trip to China half-full of worthless ballast, the economics are different. Coal could be quickly transferred by train from the Powder River Basin to ports in Washington, Oregon, or British Columbia, if the ports are authorized by local governments.
The decision point here will come over the next year or so as decisions are made about the ports. The ports will require both state and federal approval (the EPA has expressed interest in assessing the proposals and Army Corps of Engineers has jurisdiction over the region’s waterways). This is already an issue in this November’s Washington governor’s election, and will be fought over the next year.
The conclusions are these: (1) Coal extraction companies that rely on eastern coal are due for a decline in competitiveness and productivity due to long term market and environmental forces, and (2) Western-based coal extraction companies could follow – but they have a potential lifeline in Asian export markets.