I spend so much time immersed in the minutiae of coal markets that I forget that most people—the normal ones, I mean—pay almost no attention to trends in the global coal industry.
There’s no shame in that, obviously. Still, based on conversations I had with friends and family over the holidays, it’s clear that lots of people have some serious misconceptions about coal exports. The folks with whom I chatted were gobsmacked to find out that global coal markets have been collapsing for five straight years, and that the prospects for US coal exports look gloomier than they’ve been in nearly a decade. For some reason, they had assumed that coal exports were still a thriving and lucrative business proposition.
Here are a few facts that bear repeating—and lots of links to evidence showing just how badly mistaken coal myths really are.
Fact #1: China’s coal consumption has been shrinking for years.
Many folks still believe that China has an unlimited appetite for coal and that the country’s industries and power plants would be delighted to buy any and all coal we send their way.
But in reality, China’s coal consumption peaked in 2013, fell by about 3 percent in 2014, and fell another 4 to 5 percent over the first 11 months of 2015. All told, China’s cutbacks have totaled some 300 million tons per year—the equivalent of one-third of total coal output in the US, the world’s second largest coal producer. So while China still has a huge appetite for coal, the country has slimmed down impressively.
The story behind China’s shrinking appetite for coal is complex and multifaceted: a slowing economy, a gradual economic shift away from energy-intensive industries and towards consumer goods and services, growth in energy efficiency and renewable energy, and an ongoing air-quality catastrophe that’s prompted aggressive policy reactions by the Chinese government. There’s no indication that any of these trends will reverse themselves any time soon.
These declines have precipitated a financial bloodbath for China’s coal industry. Amid sweeping layoffs and mine closures, some Chinese mine laborers have been forced to wait for months for their paychecks to arrive. But despite these cutbacks, the country still has far more coal than it needs and recently announced plans to close 1,000 additional coal mines this year, while imposing a 3-year moratorium on new coal mines.
Fact #2: Exports from the Powder River Basin to Asia have been unprofitable since 2013.
Many folks seemed to believe that US coal companies can make money selling coal to Asia. But the truth is that most US coal exports to Asia stopped being profitable years ago.
Consider the case of Cloud Peak Energy, the best-positioned US coal exporter in the Powder River Basin, which stretches across vast swaths of southern Montana and northern Wyoming. As we’ve documented, Cloud Peak has been losing money on exports since the middle of 2013. Their only saving grace was that back when prices were high they used futures contracts to lock in profits. But as those futures contracts started to run out, the red ink started flowing faster and faster. Last fall the losses got so bad that Cloud Peak decided to halt all exports, even though it’s still contractually obligated to pay steep penalties to rail and port companies for not shipping coal.
For a brief period, starting in about 2010, coal prices were high enough that US companies could make money on exports. But prices started dropping in 2011 and have collapsed for nearly 5 straight years. And despite the hopes of coal industry execs, there’s no price rebound in sight. The futures market currently predicts that a key international coal price benchmark will keep falling for the next several years.
Fact #3: China is cutting imports from everywhere. The US is in the same boat as everyone else.
Some folks I chatted with seemed to believe that if the US cut its exports, other countries would simply pick up the slack. But in today’s international coal market, there are no winners, only losers: the entire seaborne coal market has seen shipments plummet and profits vanish. Australia’s coal mining sector is in a shambles, with massive job losses across the entire sector and coal boom towns turning into ghost towns. Indonesia’s exports are slumping, with a 17 percent decline anticipated for 2016 alone. Exports from British Columbia’s Ridley coal terminal have been in freefall, with further declines in the offing for 2016.
The big reason, again, is China. With domestic consumption falling, China has taken aggressive steps to protect its own coal industry from imports, both by levying coal import tariffs and by imposing quality controls on imports. At the same time, the country is channeling some industries inland, away from smog-choked coastal cities (and also away from import markets). It’s also forcing cutbacks in coal consumption in the coastal provinces, where imports are most competitive. The result: Chinese customs data shows that imports last November were down more than 50 percent from January 2014.
Those cutbacks came from everywhere, not just the US. It’s just not true that “our pain is Australia’s gain,” or that China is getting its coal “from somewhere else.” The real story is that every coal exporter is getting hit—and the places that had built expensive infrastructure to feed China’s allegedly “bottomless” appetite for coal are getting hit worst of all.
Fact #4: There’s absolutely nothing on the horizon that can replace the collapsing demand from China.
About a year ago, as Chinese imports faltered, US exporters began to talk about the bright prospects for exports to South Korea. But the Chinese declines absolutely dwarf any other potential import gains in the rest of the Pacific Rim. Recall that China has nearly 1.4 billion residents; South Korea, just 50 million. In that context, the hopes that South Korean imports could counteract China’s decline seem preposterous.
For a while it looked as if rising demand from India might start to replace some of the Chinese import cutbacks. But after years of rising imports, India’s coal minister has pledged to make the country self-sufficient in coal, ceasing all coal imports by 2017. Analysts at Bloomberg New Energy Finance consider that timetable overambitious, but still believe that India’s imports will sink and likely vanish by 2023. But the Indian government’s efforts to trim imports have already yielded success: the subcontinent notched a 15 percent year-over-year coal import decline from April through December 2015, with declines accelerating towards the end of the year.
In short, there’s no realistic hope that some other country, or set of countries, will replace China’s lost demand. Instead, it’s likely that the seaborne coal market will sink even further as India’s coal imports ebb.
Fact #5: The odds are that US coal producers will always be at a disadvantage to competitors in Asia and Australia.
This seems to be a hard one for people to grasp. But under typical market circumstances, the US coal industry just can’t compete in Asian markets. Our coal is just too far away, and the transportation costs are too high.
And it isn’t just me who’s saying this. Back in June 2012, when the coal bubble still had some air in it, coal industry analysts at Wood Mackenzie warned Northwest shippers that “Indonesian Coal enjoys a significant cost advantage” over even the best Powder River Basin coal. They cautioned that for US coal exporters, “Competition could be fierce, especially if Asian demand weakens and the market becomes periodically or permanently oversupplied.” Well, that’s exactly what’s happened: Asian demand weakened, the seaborne coal market is now oversupplied, and any hopes for profitable exports have gone up in smoke.
The disappointing truth for US coal executives is that US coal exports to the Pacific Rim will only be profitable during those relatively rare periods when coal prices spike. And while prices have spiked from time to time, they’ve promptly come back down to earth, falling to a point where US exports just can’t compete. Coal executives mistook a temporary price bubble for the “the new normal” and convinced themselves, along with a lot of investors, that the US was well positioned to make money in Asia. They were dead wrong—demonstrating, perhaps, that coal executives don’t have to be smart or insightful to get rich.
Mike Schuster
Thanks for the good news, Sightline — keep up the good work!
Lanny Erdos
Very insightful article Clark…..here in Ohio, our coal operators are certainly feeling the pain. Not so much relative to the export market, but more so to low cost natural gas, and federal regulations being pushed down by the administration.
Clark Williams-Derry
It’s very interesting to me that so many forces are converging at once to undermine coal.
Domestically, fracking has sent natural gas prices so low that gas out-competes coal. And the growth of renewables, coupled with the declines in cost for solar and wind keeps eating at coal’s market. At the same time state and federal regulations are making it harder to keep polluting plants open.
Internationally, you’ve got China’s economic slowdown, along with a host of very different policies and circumstances in different countries (China, India, Indonesia, Australia, and Europe) that are combining to undermine exports. Some of the policies are actually pro-coal: India is cutting coal imports by boosting domestic production, while Australia’s government until recently has been so rabidly pro-coal that they’ve flooded the market. Other policies are coal-neutral, such as the shift in industrial growth away from the Chinese coast. Others are protectionist, like Chinese coal import tarriffs. Others are anti-coal, like China’s curtailment of coal consumption in smog-choked regions, or its promotion of renewables.
What’s becoming increasingly clear is that to create the kind of price rebound that US coal exporters need, most of these trends and policies will have to reverse themselves. It’s not just one or two things that have to go in the other direction, it’s LOTS of things. And that makes the chance for a price rebound look more and more remote.
Norm Cimon
For the utilities the coal companies have relied on, the biggest challenge is just now appearing on the horizon. That’s the integration of microgrid architecture, solar power, and storage. The utilities are caught in a vice. Customers, including their largest ones can roll their own, and then ask to sell the excess back to the utility. That will make their business model obsolete.
That model depends on growth. That has allowed them to include a guaranteed return in their rate base. No growth, no return on investment, and no investors to lend you money. If they try to squeeze more money out of a shrinking consumer base, they just chase more of them out the door. That feedback loop is deadly.
There’s already a stampede to build ever-better batteries for scalable storage at that micro or smallgrid level. Those grids have intelligence built in. Networked computing power allows for automated grid-to-grid communications. California is in the process of implementing the rules for those communications. Why bother with the utility if you can swap power from entities that have it, to those that need it? All of that can be automated including the bidding process, and it will be.
Having realized the existential threat, utilities are pushing back at the level of PUCs, where they believe they can gain the most leverage. They can’t stop the process, but they can greatly slow it down. Warren Buffet has been buying up coal assets, but in states where there’s a regulated market. It’s easy enough to figure out why.
Utility claims of additional costs have some legitimacy, but economic analyses have it largely coming out as a wash. They lose the guaranteed rate of return from a shrinking customer base, but there are lots of possibilities to come up with new models. The problem is one that plagues a lot of old-line businesses. Find new ways to make money using your quality assets, or fall by the wayside. They need to create themselves a new future. How many are prepared to do that?
We will, I think, see the same kind of mad scramble as we’ve seen ever since digital technology came into play, and the grid has had nothing digital on it till now. Think about what that has meant to any number of the goods and services we interact with on an everyday basis: supply chains automated from ordering to delivery tracking; information flows completely disrupted and re-channeled including but not limited to television, movies, publishing, news consumption,… it goes on and on. That’s what’s on that horizon for utilities.
It’s also why coal is probably never going to regain the foothold it’s been losing to renewable energy. The changes have only just started for their biggest customers, and those changes revolve around a much reduced need for electric fuels of all kinds. That’s a very environment from the one they’ve known.
Nick Grealy
The collapse of coal trade is certainly good news for the environment. But is it good news for environmentalists? The reality is that coal is primarily falling because natural gas is much cheaper. Certainly the good news about carbon intensity and a surge in renewables are significant factors, but they are not the only factor. Without the abundance of natural gas from shale, it would be a much less optimistic picture. So the reality is that fracking is, as “greenwashers” like me have been pointing out for some years, is a net positive for the environment. As Oscar Wilde said, there are two great tragedies in life: Not getting your heart’s desire, and getting it.
http://www.nohotair.co.uk/index.php/shale-gas-2012/168-energy-policy/2673-uk-green-s-great-tragedy
This trend will only accelerate as LNG, now cheaper than coal even in Asia thanks to a de-link from oil prices (and oil prices collapse) repeats what happened in the US. It will take a while longer for Asian coal plants to be convinced that the fall in gas prices is permanent, but once that happens, CO2 in China will drop and make the urgency (and business models) of relatively insignificant changes in OECD energy less important.
Rik
Gas may be less intensive in the short term but the infrastructure that is built to transport and burn it will be around for ~40 years, and the holders of those assets are determined to get a return on their investment.
In the long term, it is sometimes better to let a dirty old coal plant burn a few years longer and then replace it with renewables, then to replace it a little earlier with a gas plant that will produce CO2 for the next half a century.
That gas infrastructure and tens of thousands of fracking wells also represents capital and labour that could have been building renewable capacity instead.
And that’s not getting in to fracking’s methane release, land use, healthcare cost, and flaring issues. California currently has a tale to tell about gas which features the words “state of emergency”.
The one bright spot and possible saving grace in this situation is that fracking wells are notoriously short-term producers, presenting the possibility that at some point in the future fracking could be banned and instead excess solar generation could be used to produce methane from atmospheric CO2, which would then make use of the aforementioned gas infrastructure to deliver carbon-neutral energy.
Steve Harrell
Outstanding summary, Clark. I wish I had time to follow even half your links.