The incredible shrinking US coal industry

September 30, 2013

Midwest Generation, a subsidiary of Edison International, will retire its Fisk and Crawford coal plants, two of the oldest and dirtiest coal-fired power plants in the nation. The February 29, 2012 announcement marks an historic victory for a decade-long grassroots campaign to protect Chicago residents from the harmful impacts of coal pollution. According to agreements signed by Midwest Generation, the Clean Power Coalition, and the City of Chicago, the Fisk coal plant in Pilsen will shut down in 2012 and the Crawford coal plant in Little Village will shut down by 2014. Kumi Naidoo, Executive Director of Greenpeace International attends a rally with activists near the Fisk Power Station in Chicago, Illinois, September 24, 2011. Kumi came to Chicago to participate in the Moving Planet global day of action to demand solutions to the climate crisis as well as meet with residents campaigning to close the Fisk and Crawford Coal Plants polluting their neighborhood. Photo by Stephen Carrera/Greenpeace

Stephen J. Carerra/Greenpeace

Its been a big month for news on the state of the US coal industry from announcements that China is significantly curbing coal use, to the long-awaited unveiling of the Obama Administrations carbon standards for new coal-fired power plants.

Despite Peabody's claims thatWe have trillions of tons of coal resources in the world. You can expect the world to use them all," a very different reality is shaping up."King Coal" is being reduced to pawn.The open secret is that it has very little to do with new EPA rules.

The beginning of the end.

Its old news that the coal industry is in trouble.Peabody (BTU) and Arch (ACI), the largest US coal companies, have lost more than 75% of their peak value since 2011, as coal struggles to compete with renewable energy and gas. 170 new coal plants representing $450 billion in capital investment have been canceled. Few utility companies are taking a gamble on new coal generation; those who have are in financial trouble. Meanwhile, community activism has worked in tandem with shifting economics to secure the retirement of dozens of existing coal plants. Current and pending federal health and climate rules will only accelerate this trend.

[caption id="attachment_20423" align="aligncenter" width="762"]Peabody (BTU) and Arch (ACI) stocks have lost more than 75% of their value, despite overall economic recovery Peabody (BTU) and Arch (ACI) stocks have lost more than 75% of their value since their 2011 peak, despite overall economic recovery. Source: Google Finance[/caption]

While all eyes were on EPA, a surprising indicator of the severity of coals decline emerged from the relatively obscure federal coal leasing program. The Department of Interior (DOI), through its Bureau of Land Management (BLM), owns and manages one of the worlds largest coal reserves in the world in the Powder River Basin of Wyoming and Montana. Since the start of the Obama Administration, DOI has leased over 2 billion tons of federal coal to companies like Peabody, at rates of around $1 per ton. Literally cheaper than dirt.

[caption id="attachment_19614" align="alignright" width="300"]Strip mining for coal in the Powder River Basin Strip mining for coal in the Powder River Basin[/caption]

Not surprisingly, this leasing program has come under intense public scrutiny from environmentalists, taxpayer advocates, US Senators, and federal investigators over claims that it is shortchanging taxpayers, ignoring the industrys desire to export coal overseas, and fueling climate change.

However, recently, BLM is facing a new set of challenges. For the second time in less than a month, federal coal auctions in the Powder River Basin have resulted in no coal sales.

On August 21st, Cloud Peak Energy declined to bid for the Maysdorf II coal tract, citing current market conditions and the uncertainty caused by the current political and regulatory environment towards coal and coal-powered generation. This marked the first time in Wyomings history that a coal lease sale failed to attract a single bidder.

A few weeks later, on Sept 18th, Kiewit mining company placed a 21 cent per ton bid for the Hay Creek II tract the lowest WY bid in 15 years. BLM rejected the offer. As Ben Jervey at DeSmog blog put it, Hey, at least we cant accuse the BLM of literally giving away coal on public lands.

Twice, the federal government offered up huge tracts of coal, for what would have been giveaway prices, and the coal industry effectively passed. Coal companies have the whole leasing system rigged in their favor, and its still not worth the risk!

But maybe its not surprising. The US is moving away from coal in favor of cleaner energy, and the coal mining industry is wary of dumping big money into mines oriented to meet domestic demand. For all the hand-wringing and outrage over EPAs carbon standards for new coal plants, the truth is coal has been behind the curve for some time.

Which brings us to China.

With declining demand at home, the US coal industry has increasingly looked to the export market as its saving grace. Cloud Peak, the company that declined the Maysdorf II tract designed to feed its domestic coal plant serving Cordero Rojo mine, is working to rapidly expand what it calls an export-focused mine complex in Montana.

Unfortunately for the poor coal companies who have poisoned our air and water for generations it appears that opportunity has passed.

Global coal prices surged in mid 2009, fueled by a large increase in demand for imported coal from China. Chinas appetite made coal sales to Asia a lucrative business proposal for companies who could get their rocks on ships, and coal export terminal proposals popped up soon after in Oregon and Washington State. The domestic market was slowing but, hey, coal companies had a fire exit.

[caption id="attachment_20417" align="alignright" width="302"]coal_prices-080413-projects_still_open-D-302x550 Analysis from Sightline Institute shows that the three remaining NW coal export proposals were launched after the global market peaked.[/caption]

However, it now appears that market has peaked and is on the decline. Chinas coal appetite is cooling, and with it the entire Pacific seaborne market. Analysts at Bernstein were blunter:

Globally, Chinese demand growth has been the primary driver or the backstop behind every new investment in coal mining over the last decade. The global coal market ended with the collapse in price in 2012.

Ross Macfarlane at Climate Solutions recently posted a brilliant digest of new analysis from Wall St. firms such as Goldman Sachs, Bernstein, and Citibank all pointing to a bleak future for the global coal trade and the US coal industry in particular.

US coal companies are already feeling the impacts of this downturn. Sightline Institute'srecent analysis of Cloud Peaks second quarter earnings statement revealed that the company made significantly more money betting against coal than it did on actual foreign sales.

And this month, the Chinese government announced a far-reaching air pollution response plan that will lock in additional, long-term declines in Chinese coal consumption especially in major importing regions.

The plan sets ambitious timelines for reducing fine particulate pollution in Beijing and other key heavily-populated cities. It calls for three main economic areas Beijing-Tianjin-Hebei, Yangtze River Delta and Pearl River Delta to peak and decline their coal consumption by 2017. It also bans the approval of new conventional coal-fired power plants in these key regions.

The ban on new coal-fired power plants covers China's most important coal importing regions; the Pearl River Delta and Yangtze River Delta, responsible for more than 50% of thermal coal imports. Its hard to read the crystal ball on the long term risks and opportunities in the Pacific coal market, but if US coal companies are hoping for a dramatic surge in new coal demand in Eastern China to restore profitability, they might not want to hold their breath.

The New York Times, Associated Press, and Wall Street Journal have reported on these developments with little optimism for the US coal industry, evidenced by headlines like Coal's future darkens around the world.

Cracks in the Carbon Bubble

This mix of declining domestic demand and softening coal markets makes the US coal industry the potential bellwether of the coming cracks in the carbon bubble. Peabody's billions of tons of reserves were scooped up in the promise of growing markets and bigger margins. Now, one word describes the outlook for coal's economic relevance: smaller.

Analyses from Carbon Tracker have warned that money invested in expanding fossil fuel reserves represent wasted capital as it becomes increasingly clear that most of the worlds fossil fuels are unburnable. Warnings that most fossil fuel reserves cannot be burned have also come from global institutions like theInternational Energy Agencyand most recently, theIntergovernmental Panel on Climate Change report.

Coal reserves are at particular risk of becoming stranded assets for several reasons.As the most polluting fossil fuel, any serious action to reduce carbon pollution must dramatically reduce coal consumption EPAs new and pending carbon rules are a clear sign of whats to come. Further, coal-fired power plants are major sources of deadly air pollution, so efforts to improve air quality are pushing the worlds top coal consumers China and the United States to rein in coal now.

The US coal industry owns billions of tons of reserves in a developed country that's steadily retiring coal fired power plants, and their only escape route is a global market that has likely already peaked. Peabody and Arch, the two leading US coal companies, are badly positioned to deal with todays global markets. Their value is depressed, debt levels are too high, and their future sales potential is impaired.

Do not be surprised if the value of these companies, already at record lows, decreases further.

Reporting on major shifts in the domestic and global coal market, the Wall Street Journal recently concluded, Investors in coal might well feel paranoid. But remember: it isn't paranoia if the world really is out to get you.

Down, but not out.

With so much bad news for coal, it might be time to revisit the classic activist narrative of David vs the Coal Industry Goliath. It may be some time before we see the end of coal in a literal sense, but we are approaching a future with fewer, smaller, more volatile coal companies competing for a dwindling share of the electricity market. Coal CEOs should fear irrelevance before death.

But theres another factor at play the coal industry has historically punched above its weight, politically. You dont have to search far to find examples of politicians and regulators green-lighting environmental and financial boondoggles peddled by the US coal industry.

Deutsche Bank may call coal a dead man walking. But the industry is still very alive certain corners of American politics.

Department of Interior continues to hold lease sales, with billions of tons of coal in the leasing pipeline. Obamas Army Corps of Engineers refuses to look at the full impacts of coal export proposals. Local governments are considering the risks of increased coal dust and diesel pollution because of the promise of economic development, even though that may never come. Members of Congress are introducing countless bills to roll back environmental protections.

Fortunately, these last ditch efforts to secure political support for risky coal projects are being met by a powerful and growing grassroots movement.

Air Pollution in Beijing

Chinas ambitious coal reduction plan is a response to growing public demands for clean air. Research shows that every year thousands of Chinese citizens are dying from coal pollution. Those revelations have sowed anger in a Chinese culture that traditionally holds great value on long life, and the ability to enjoy active old ages with grandchildren and friends.

Here in the US, the heads of more than 20 organizations representing millions of people have called on Interior Secretary Jewell to establish a moratorium on new federal coal leasing. The two failed auctions in the midst of so much controversy should be a wakeup call and opportunity for Jewell to put the brakes on this carbon giveaway. The market is declaring a moratorium; the Secretary must use her policy levers to reshape the program.

Portland Rally Against Coal Exports

And thousands of people are turning out to public hearings, rallies, and workshops in opposition to new coal export terminals on the West Coast, joining their voices with small businesses, ranchers, religious leaders, and elected officials at all levels of government.

People on both sides of the Pacific are drawing a line against coal, and they will win. Because, in the words of Seattle Times columnist Lance Dickie, The only return on investment with coal, coal trains and coal terminals is carbon dioxide and ocean acidification.

The question remains, of course, if we can end our use of coal in time to avoid catastrophic climate change... or if we can draw strength from the victories of the last several years to defeat the Goliaths in the oil and gas industry. But, with a long and difficult fight ahead, we owe it ourselves to pause and reflect on the successes at hand.

Cheers, to the beginning of the end of coal.

Thanks to Ross MacFarlane, Clark Williams-Derry, and Tom Sanzillo for providing additional resources.

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