Weak job prospects

Why Trump’s big promises for coal min­ers may be empty.

The Washington Post Sunday - - FRONT PAGE - BY STEVEN MUF­SON

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 com­pa­nies 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 steel­work­ers back to work.” Half a dozen big com­pa­nies have seized the mo­ment to is­sue stock or sell bonds to raise money from in­vestors will­ing to wa­ger on the ef­fects of 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: Coal-fired 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 to make steel in In­dia and China and 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 to show prof­its, coal op­er­a­tors 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 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.”

The saga of Pe­abody En­ergy

Coal has had a tough decade. In 2007, it fired 50 per­cent of U.S. elec­tric­ity pro­duc­tion. 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 — that’s 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 years, 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.

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, but later it went bank­rupt.

Pe­abody made a ill-timed $5.2 bil­lion ac­qui­si­tion of Macarthur Coal of Aus- 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 the Hamp­ton Roads area of 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.

Fast-shift­ing for­tunes

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 can also be sep­a­rated from the pol­i­tics of coal, which hinge on jobs. Trump wants to re­vive the busi­ness, and dur­ing the cam­paign he said he would “get those min­ers back to work.” Op­ti­mism about the new pres­i­dent helped Pe­abody En­ergy shares, which surged 49 per­cent the day af­ter Trump’s elec­tion win.

But while Vitta said that “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 said 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 he added that “our view is not pred­i­cated on over­all jobs.”

The in­dus­try’s for­tunes can be mer­cu­rial 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, to about $150 a ton.

U.S. ex­ports of met­al­lur­gi­cal coal have dropped 45 per­cent since their 2013 peak. The con­sult­ing firm Wood Macken­zie projects a fur­ther slide.

That has damp­ened op­ti­mism and prompted at least one com­pany to shelve plans. The coal com­pany Cloud Peak En­tralia ergy 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. But 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 an­nounced it was scrap­ping the con­struc­tion of 85 planned coal plants, ac­cord­ing to a McKin­sey re­port. That pushed ther­mal coal prices down, too.

And th­ese mar­ket jolts hap­pened 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 per thou­sand cu­bic feet — above cur­rent prices.

‘A pro-coal pres­i­dent’

How will Trump deal with this? Some coal sup­port­ers pin their hopes on the pres­i­dent sup­port­ing “clean coal tech­nol­ogy,” which re­moves and stores car­bon diox­ide from coal-burn­ing plants. That tech­nol­ogy, which is costly and re­lies on fed­eral aid, doesn’t ac­tu­ally make coal clean; it ad­dresses cli­mate con­cerns.

“In light of re­cent calls for dra­matic cuts to the fed­eral bud­get, we want to stress that ev­ery dol­lar al­lo­cated to fos­sil en­ergy re­search is an in­vest­ment in the long-term fu­ture of Amer­ica’s coal and fos­sil fuel in­dus­try,” three coal com­pany chief ex­ec­u­tives and three union lead­ers wrote in a March 10 let­ter to Trump. “Fed­eral sup­port plays a ma­jor role in com­mer­cial­iz­ing tech­nol­ogy and mak­ing it cost-vi­able for the pri­vate sec­tor.”

Trump, how­ever, has shown no signs of back­ing that tech­nol­ogy. His bud­get pro­posal for the En­ergy De­part­ment would cut $2 bil­lion from a num­ber of pro­grams that help fund ba­sic sci­ence as well as full-size, car­bon-cap­ture plants.

In­stead Trump, who has voiced skep­ti­cism about cli­mate change, on Feb. 16 signed leg­is­la­tion rolling back a reg­u­la­tion on coal de­bris dumped in streams. At the sign­ing cer­e­mony at the White House were Ken­tucky’s sen­a­tors, Ma­jor­ity Leader Mitch McCon­nell and Rand Paul, both Repub­li­cans; Sen. Joe Manchin III (D-W.Va.); and Mur­ray Coal ex­ec­u­tives and min­ers.

One of the min­ers, a 45-year vet­eran of the busi­ness, praised Trump. “I’m very proud to be here with my pres­i­dent of the United States who keeps his word, and we thank you very much, sir,” he said, wear­ing a blue work shirt and a hard hat.

But it will be hard for Trump to de­liver. “To bring jobs back in Ken­tucky is a tough propo­si­tion un­less there’s a sub­sidy, be­cause it doesn’t make eco­nomic sense,” Vitta said.

That’s been true for years, notwith­stand­ing some of the po­lit­i­cal rhetoric.

“Our folks are so ex­cited to have a pro-coal pres­i­dent, and we thank you so much for be­ing on our side,” McCon­nell said at the White House event, adding that the last eight years brought a “de­pres­sion” to Eastern Ken­tucky.

In fact, the Fed­eral Re­serve Bank of St. Louis re­ports the un­em­ploy­ment rate in Clay County, one of the hard­est-hit coun­ties in the state’s eastern coal re­gion, at 8.4 per­cent in De­cem­ber, half the rate it was at its peak in Jan­uary 2010. It was 14.1 per­cent when Pres­i­dent Obama took of­fice.

In Ari­zona, the Navajo Gen­er­at­ing Sta­tion could also pro­vide an early test for the pres­i­dent. Its own­ers have de­cided to close the mas­sive coal plant. The Na­tive Amer­i­can tribe, whose mem­bers hold about 90 per­cent of the more than 400 jobs there, is ap­peal­ing to the Trump ad­min­is­tra­tion for help in keep­ing the plant run­ning. Yet do­ing that would be ex­pen­sive. Sanzillo es­ti­mates that the Navajo sta­tion pro­duces elec­tric­ity at rates about 50 per­cent higher than mar­ket rates.

“There’s no good eco­nomic rea­son to keep NGS on life sup­port, and in­deed the time for clo­sure has come,” Sanzillo’s group said in a blog post. “The plant is em­blem­atic of a core chal­lenge fac­ing the tra­di­tion­ally hide­bound U.S. elec­tric­i­ty­gen­er­a­tion in­dus­try, as the mar­ket for coal-fired elec­tric­ity is shrink­ing.”

And, he added, “that’s re­gard­less of re­cent po­lit­i­cal events.”

LUKE SHAR­RETT/BLOOMBERG NEWS

TOP: A train is loaded with coal at the Pe­abody En­ergy’s Somerville Cen­tral mine in Oak­land City, Ind. Pe­abody is plan­ning to emerge from bank­ruptcy. LEFT: A dragline ex­ca­va­tor moves earth at the mine.

LUKE SHAR­RETT/BLOOMBERG NEWS

LUKE SHAR­RETT/BLOOMBERG NEWS

Bull­doz­ers are parked at Pe­abody En­ergy’s Somerville Cen­tral Mine in Oak­land City, Ind. The com­pany — the big­gest U.S. coal op­er­a­tor — said last week that it hopes to emerge from bank­ruptcy next month.

POOL PHOTO BY RON SACHS/EURO­PEAN PRESSPHOTO AGENCY

Pres­i­dent Trump shakes hands with a coal miner af­ter Trump over­ruled a reg­u­la­tion to pre­vent mine de­bris from be­ing dumped in streams. The pres­i­dent has promised to roll back reg­u­la­tions and re­vive the coal in­dus­try.

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