Monday, February 29, 2016

The Hidden Cause of America’s Coal Collapse

The US coal mining sector is in free-fall.  The market value of US coal companies today is a fraction of what it was just a few years ago. Dozens have gone bankrupt. The public debate regarding the cause of US coal’s decline has focused largely on domestic factors.  Some see low-cost natural gas as the primary culprit.  Others blame environmental regulations.  But the leading cause of the decline in US coal production revenue is the one most overlooked – a slow-down in Chinese demand.

A Sector in Decline
The American coal industry is hurting.  The four largest US miners by output, Peabody Energy, Arch Coal, Cloud Peak Energy and Alpha Natural Resources, which account for nearly half of US production were worth a combined $34 billion at their peak in 2011.  Today they are worth $150 million.  Arch and Alpha filed for chapter 11 bankruptcy protection last year, joining a number of other smaller miners including Patriot Coal and Walter Energy.

In debating the root cause of American coal companies’ current ills, observers generally point to recent changes in the US electric power sector.  Coal’s share of US power generation has declined from an average of 53% between 1980 and 2005 to 34% in 2015 .
As a result, domestic coal consumption has declined by 32% over the past ten years.  While this has certainly hit the industry hard, the more important source of coal industry distress has nothing to do with the US power sector.  Indeed it has very little to do with the US.
Mind the Met
It’s certainly true that the majority of the American coal production is used for power generation within the US.  Of the billion tons of coal mined in 2014, 90% was steam coal used to generate electricity (or heat in industrial boilers) at facilities located in the US.  A much smaller share, 3%, was exported for use in power plants elsewhere in the world.  The remainder (7%) was metallurgical coal (or “met” coal) used to make steel.  While a relatively small share production in tonnage terms, met coal has traditionally fetched a much higher price than steam coal both in the US and around the world.  Met prices surpassed $200 a ton in 2011, 250% more than relatively expensive Central Appalachian steam coal sold for during that same period of time.

Since 2011, however, met prices have collapsed, down to $85 a ton at the end of last year. Steam coal prices have softened as well, but not nearly as much as met.  If you combine these changes in price, with the changes in production quantities over the past four years, met’s role in the US coal sector’s collapse becomes pretty clear.  Between 2011 and 2014, 93% of the decline in US coal producer revenue was due to a drop in met quantities and prices.  A sharp drop in US coal-fired power generation– and resulting drop in steam coal production – played a more significant role in 2015, but met still accounted for 57% of the revenue decline relative to 2011. Another 6% was due to a decline US steam coal exports.  That leaves only 38% of the decline in US coal producer revenue attributable to weak domestic steam coal demand 
Betting on a Future that Never Arrived
It’s not just the direct impact of the current Chinese coal consumption slowdown on US coal production revenue that has American miners on the ropes.  It’s the change in outlook for Chinese coal consumption going forward. 

[China's big change is mostly for environmental reasons:  to reduce urban air pollution and to avoid catastrophic climate change.]

Read more at The Hidden Cause of America’s Coal Collapse

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