Canary in the mine
The battered U.S. coal industry is showing faint signs of life, but its prognosis remains dim.
The battered U.S. coal industry is showing flickering signs of life. Yet the prognosis for Big Coal remains dim.
Coal prices are about double what they were a year ago. Rail car deliveries of coal are up 16 percent this year. The more than 50 coal mining firms that went bankrupt over the past couple of years have unloaded billions of dollars of debt. And President Trump has vowed to roll back environmental regulations that the industry says are part of a “war on coal.”
The stocks of coal companies have enjoyed a “Trump bump” thanks to the president’s pledges to “bring the coal industry back” and “put our great miners and steel workers back to work.” Half a dozen big companies have seized the moment to issue stock or sell bonds to raise money from optimistic investors willing to wager on a friendlier Trump administration. Peabody Energy, the nation’s biggest coal behemoth, hopes to win court approval to come out of bankruptcy in April.
But the obstacles on the other side of the ledger remain daunting: Coalfired power plants continue to shut their doors. Bountiful supplies of U.S. shale gas are keeping natural gas prices low and competitive, and renewable sources of power generation are growing rapidly. Though most experts expect U.S. coal sales and output to top last year’s levels, they also expect the decline to resume in 2018.
“The coal industry is saying it’s back. It’s not back,” said Tom Sanzillo, director of finance at the Institute for Energy Economics & Financial Analysis. “This is a fool’s errand.”
The institute is supported by a variety of liberal philanthropies.
Some coal companies will survive, and some could thrive. Metallurgical coal will be needed for steel both in India and China as well as in the United States, especially if there is a boost in infrastructure spending. And thermal coal will still be used to generate electricity for years, even if at lower rates.
But in order to show profits, they will have to trim output from the oldest, least efficient mines in Appalachia (where Trump garnered crucial votes in the election) and shift their focus to the Illinois Basin and the Powder River Basin in Wyoming.
Those big open pit mines need fewer workers —doing nothing to help Trump bring back jobs for “our great miners.”
“A lot of people conflate two primary things: the coal industry and coal jobs,” said Chiza B. Vitta, a coal analyst at Standard & Poor’s. “Even if the coal industry were to do better, that doesn’t translate into coal jobs. Over time the process has become more and more efficient, and they’re able to mine with fewer and fewer people working.”
Some analysts don’t even expect the industry to do better.
“Trump’s rhetoric on the campaign trail would also suggest that coal is about to see a big lift in the post-Obama era, but the reality may be less rosy,” Citigroup said in a series of reports to investors earlier this year. “The regulatory environment for coal should improve under Trump’s presidency,” the bank said. But, it added, “comparative economics for coal, renewables and gas place clean coal firmly at the bottom of the stack in the U.S.”
Coal has had a tough decade. In 2007, it fired 50 percent of U.S. electricity. In 2016, that share dropped to 31 percent of a somewhat smaller total, according to the Energy Information Administration. The EIA expects the share to creep back up a point or two, but then head down again.
Citigroup expects coal plants with a capacity of about 5 gigawatts will be retired this year —or enough to power roughly 3.4 million homes for a year. Even though the average age of a U.S. coal-fired plant is 39, there hasn’t been an application to build a new coal plant in years. But over the past 15 years, thanks to plentiful shale gas reserves, natural gas plants with nearly 228 gigawatts of capacity have been built.
To make matters worse, the biggest companies in the industry borrowed heavily to buy other coal companies, loading up on debt just as natural gas supplies soared and coal prices tumbled.
One company’s story
The saga of Peabody Energy tracks the industry’s story. Peabody got out of Appalachia in 2007, spinning off its mines there to a company called Patriot. For a short while, Patriot did better than Peabody, then later it also went bankrupt.
Peabody then made a illtimed $5.2 billion acquisition of Macarthur Coal of Australia in 2011, near the peak for coal prices. The coal titan underestimated rival suppliers in Asia and overestimated the growth of Chinese coal consumption.
It also lost money hedging against currencies, according to Vic Svec, senior vice president for investor and corporate relations at Peabody.
Now, Peabody hopes to emerge from bankruptcy with just $2 billion in debt, down from $7 billion. It has reduced its workforce even at sites that remain open and operating. It has idled its highest cost mine, the Burton mine in Australia. It has sold off a mine in New South Wales and an interest in a port in Hampton Roads, Virginia.
“The company coming out of bankruptcy is very different from the one that went in,” Svec said.
The company still has to iron out disputes with stakeholders, especially bondholders who say that Peabody executives are in cahoots with hedge funds and making the business sound worse than it was last year so that it pays old bondholders less than they deserve. At the same time, now Peabody has an interest in sounding good enough to attract investors, the less fortunate bondholders say.
Vitta, the analyst at Standard & Poor’s, thinks that coal companies can make money again. “You’ll see reports that this is a shrinking industry,” he said. “That can be separated from the ability of companies to be profitable.”
That assessment also can be separated from the politics of coal, which hinge on jobs. Trump wants to revive the business and during the campaign said he would “get those miners back to work.” Optimism about the new president also helped Peabody Energy shares, which surged 49 percent the day after Trump’s election win.
But Vitta said that while “we expect the companies to be in much better shape than they were,” he added that “I wouldn’t expect the expansion in production to continue.”
Svec says that “certainly the position of the new administration has been positive and could be good on a number of fronts, not least the pro-growth policies that would improve the economy. When the economy is doing well, power generation does better.”
But Svec adds that “our view is not predicated on overall jobs.”
The industry’s fortunes can be easily tossed around because changes in the U.S. and global coal markets can be sharp and fleeting. A year ago, the price of metallurgical coal, used in making steel, dipped to about $75 a ton. Then metallurgical coal prices more than tripled to about $300 after China said it would shut down many of its aging coal mines.
It didn’t last. Chinese demand was lower than expected and coal prices fell back, selling for about $150 a ton.
U.S. exports of metallurgical coal have dropped 45 percent since the 2013 peak. The consulting firm Wood Mackenzie projects further slide.
That has dampened optimism and prompted at least one company to shelve plans. The coal company Cloud Peak Energy paid $51 million to BNSF railway and a harbor terminal manager to extricate itself from a plan to boost its coal exports from the west coast to Asia.
The price of natural gas, thermal coal’s major competitor, followed a similar path as metallurgical coal. Prices hit a historic low, driving much thermal coal offline, in the first half of 2016. Then natural gas prices climbed to $3.71 per thousand cubic feet, raising hopes in the coal and gas businesses. Yet after a mild winter and more supplies of shale gas, natural gas spot prices tumbled to $2.68.
With the tough domestic coal market, exports of thermal coal could help. But China’s National Energy Administration in January 2017 announced it was scrapping the construction of 85 planned coal plants, according to McKinsey report. That pushed thermal coal prices down too.
And these market jolts happen extremely fast, making it difficult for coal industry executives to make plans. The shares of Ramaco Resources, a small metallurgical coal company in Appalachia, have slid 25 percent since Feb. 6 when it launched a rare initial public stock offering.
Peabody says that its business plan uses projections that natural gas will fluctuate between $3.05 and $3.50 a thousand cubic feet — above current prices.