Coal news and updates

“There’s nothing tougher in this job than looking a good man or woman in the eye and saying, ‘Because of nothing you’ve done, we’ve got nothing for you’.”

Kevin Crutchfield, chief executive of Alpha Natural Resources, gives a vivid description of life at what he calls “Ground Zero” for the US coal industry. Alpha, one of the country’s largest coal producers, has cut 5,000 jobs – more than a third of its workforce – since 2011.

A year ago, coal mining in the US was in dire straits, battered by competition from cheap natural gas for power generation, and threatened by environmental regulations.

 

 

Since then, its position has become even worse. President Barack Obama’s administration has set out a plan for curbing carbon-dioxide emissions from power plants that would mean a further steep reduction in coal-fired generation. Meanwhile exports, which had been seen by many in the industry as a potential lifeline, have failed to live up to expectations.

US coal miners have been cutting capital spending and jobs, and their already weak shares have fallen even further. Analysts are raising questions about when some of them will run out of cash.

The most immediate threat to coal remains the gas production unlocked by the shale revolution. Although coal-fired generation has recovered somewhat as the gas price bounced back from a 10-year low in 2012, the combination of cheap gas with environmental regulations is accelerating the retirement of coal plants.

New limits for emissions of mercury and other toxic substances, set to take effect in 2016, will force generators to install costly pollution-control equipment if they want to keep their coal plants running, or switch to cheap new gas-fired power stations instead. The US Energy Information Administration expects about 60 gigawatts of coal generation to shut down between 2012 and 2018 – a reduction of about a fifth.

 

 

 

A greater threat is looming, though, in the proposed regulations for cutting carbon-dioxide emissions from power generation, the centrepiece of Mr Obama’s climate strategy. The Environmental Protection Agency, which drew up the proposals known as the Clean Power Plan, estimates they could cut US coal demand by up to 27 per cent by 2020.

The plan has already raised a storm of political protests, mostly from Republicans, with the attorneys-general of 13 states signing a letter calling for the proposals to be withdrawn, and governors from others urging significant changes.

Legal challenges to the proposals have already been launched by Murray Energy, a privately held coal company, and by several states.

 

 

The extent of the political and legal opposition, and the practical difficulties of implementing the Clean Power Plan as proposed, make it “very difficult for us to believe it will survive”, says Matthew Preston, an analyst at Wood Mackenzie, a consultancy.

However, he expects that in time there will be some form of carbon dioxide regulations in the US, and that will mean further pressure on coal, which creates roughly twice the emissions of gas when burnt for power generation.

Meanwhile, hopes of using exports to offset weak domestic demand have been hit by lower-cost competition from Indonesia, Australia and South Africa, and a slowdown in global demand.

 

Alpha had hoped to export 12m-15m tons of thermal coal – which is mainly used for power generation – each year, but in fact has been selling only 3m-6m.

Some US coal companies, seeing a difficult future for thermal coal, acquired more assets in metallurgical or met coal, used for making steel, but there conditions are even worse. Under pressure from the economic slowdown in China, which dominates the global steel industry, world benchmark prices for met coal have dropped from $330 a tonne in 2011 to just $120 a tonne this year.

 

 

In these harsh conditions, some companies and some regions are better positioned to survive than others.

Many US coal companies are bleeding cash. Walter Energy, a specialist in met coal, has only enough left on hand to cover little more than 18 months of its cash outflow if prices stay at these levels, according to Anna Zubets-Anderson of Moody’s, the credit rating agency. Alpha and Arch Coal, she says, have up to three years, while Peabody Energy, the largest US coal miner by production, is running roughly cash neutral.

More mining companies may fold. Others may be taken over, or taken private. As Chris MacCracken of ICF, another consultancy, points out, even if the Clean Power Plan or something similar to it is implemented in full, there is still expected to be about 200GW of coal-fired generation capacity in the US, and that will need fuelling. An investor with strong nerves could look to the long term, and hope for a steep rise in the price of gas.

 

 

In any future, though, it seems likely that the lower-cost coal produced in Wyoming’s Powder River Basin or in the Illinois Basin will do better than the central Appalachian coal from the traditional heartland of the industry in Kentucky and West Virginia. Peabody’s North Antelope Rochelle mine in Wyoming alone produces more coal than the whole of West Virginia.

At $11.55 a ton, roughly one-fifth the price of central Appalachian, Powder River Basin coal is highly competitive even taking into account transportation costs and its lower heat content.

Cloud Peak Energy, which floated in 2009 with mines only in Wyoming, has suffered much less than most of its US competitors. Alpha, which earns only 8 per cent of its revenues from its Wyoming operations, has been much harder hit.

Nevertheless, if there is a shakeout in the industry now, Mr Crutchfield hints that Alpha might again play an active role. In 2011 it made the largest ever acquisition in the US coal industry, buying Massey Energy for $8.5bn including debt.

“It doesn’t look like there’s going to be any major fundamental shift in the market. So that’s just going to impose more pain on an industry that’s already challenged,” he says. “2015 could be a very interesting year for our industry.”

Peabody points to coal as solution to world’s energy poverty

In the US coal industry’s battle for survival, one new tactic is to pitch its product as a low-cost source of power for the billions of people in the world still without adequate access to energy.

Peabody Energy, the largest US coal producer, has launched an “Advanced Energy for Life” campaign, intended to highlight the issue of energy poverty in both rich and poor countries, and to advocate coal as a solution.

 

“If we are successful here, we will change the global conversation to focus on what we think is really important: that we need to get energy security for half the world’s population,” said Greg Boyce, Peabody’s chief executive.

About 1.3bn people lack access to electricity, according to the International Energy Agency, most of them in sub-Saharan Africa, India, Pakistan, Bangladesh and Indonesia.

More than 2.6bn people rely on “traditional biomass” – wood and animal dung – for cooking, which creates severe health problems.

Even in the US, about 6.8m people have been receiving help with their energy bills and insulation under the low income home energy assistance programme.

While people might have concerns about climate change caused by burning coal and other fossil fuels, Mr Boyce said, “they are secondary to human development . . . We believe in putting people first.”

Peabody believes the campaign has started to show some success. Online mentions of “energy poverty” have risen 50 per cent and “clean coal” 40 per cent compared to the period before the campaign was launched in February.

The campaign also advocates the use of the most advanced coal plants, which create lower emissions, including carbon dioxide, than earlier generations, and suggests a move towards carbon capture and storage from coal-fired power stations in the 2020s.

It also points out that much of the world is still moving towards coal, with 30 countries adding 348GW of coal-fired capacity since 2010, of which 227GW was in China and 68GW in India.

 

 

Source: ft.com