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Coal: Environmentalists predict ‘last gasp’ for a traditional industry

Coal exports, a lifeline for the besieged US mining sector, are faltering.

After hitting a record high in 2012, they declined last year. Some analysts see further weakness to come.

Coal sales are encountering difficulties from a variety of sources. The US and rival exporters such as Indonesia, Australia, South Africa and Colombia are stuck with a glut. A bulky commodity that costs a lot to ship, the US’s relative distance from Asia puts it at a disadvantage.

Volumes shuttled through old ports on the US Atlantic coast are running below capacity, thanks to the tepid economy and rise of renewable energy in Europe. Proposals to ship coal to Asia via the Pacific coast face roadblocks from environmentalists seeking to reduce carbon emissions that cause global warming.

In the past decade outbound US coal shipments almost trebled to an all-time high of 126m “short” (imperial) tons in 2012.

The sales partially offset weakness in domestic demand, as power plant operators tapped cheap shale gas for fuel. Last year, exports dipped to 118m tons. Wood Mackenzie, a consultancy, estimates fewer than 100m tons of US coal exports in 2014.

“Today, it is clearly a tough, tough market,” Kevin Crutchfield, chief executive of US coal mining company Alpha Natural Resources, told investors on a May conference call.

Coal sales are to two main markets. Metallurgical (“met”) coal is used to make steel. Thermal coal is burnt in power plants to generate electricity.

The US met coal sector is very much dependent on the export market, says Jonny Sultoon, senior analyst at Wood Mackenzie.

But the US lost out, as Australia’s producers ag­gressively won back customers they had lost because of once-in-a-generation flooding in the coal region in Queensland.

In thermal coal, Wood Mackenzie estimates US exports will fall by 25 per cent in 2014, from 60m short tons to 45m.

A loading ban that Colombia had imposed on some of its coal exports at the start of the year helped prevent an even sharper fall-off of exports, Mr Sultoon says.

“We do think exports will come off,” John Eaves, chief executive of US mining company Arch Coal, told analysts in late April.

Benchmark European thermal coal was $75 a metric tonne in late May, down 40 per cent from three years ago. US producers are not the only ones complaining. Global miners including BHP Billiton, Glencore and Vale have cut volumes in the face of weak prices. But as the US dollar strengthens against rival exporters’ currencies, it further erodes competitiveness.

Looking past 2014, analysts have a wider range of views on the pace of coal exports. Citigroup believes that thermal coal exports will rise significantly, as US coal plants shut down in the face of new emissions rules. Exports may also increase when natural gas prices settle back into a relatively low range after spikes last winter, causing power plants to burn more gas and less coal.

On the US east coast, ports such as Norfolk, Virginia, and Baltimore, Maryland, are more than big enough to handle coal exports to Europe. But European demand has been sluggish.

Eyeing growing demand in Asia, companies have proposed or are building export terminals on the Gulf of Mexico and Pacific coasts.

If all were built or expanded, annual coal export capacity has the potential to treble to more than 320m short tons, a report by ICF International, a consultancy, says.

However, “No one knows for sure whether any US port will be approved. Part of it is related to the fact that there is some opposition to the ports. It’s difficult to handicap the permitting and siting processes,” says Judah Rose, an ICF managing director. Among the new export projects is the Burnside terminal near the mouth of the Mississippi on the Gulf coast.

Trafigura, the commodities trading house, says it is investing more than $450m in the nearly 50-year-old bulk port facility so it can handle commodities, including coal from any US production basin.

The widening of the Panama Canal will make it possible for larger coal ships to reach Asian markets.

“The investment into Burnside, as one of the country’s biggest terminals, will create new opportunities to establish optimised flows of coal, both in and out of the US,” Trafigura tells the FT.

New terminals on the Pacific coast have run into strong opposition from environmental groups that argue that coal exports from the US will amplify global carbon emissions and pollute local communities.

Cesia Kearns, a senior campaign representative at the Sierra Club, says that Washington and Oregon states should not become a “conduit for coal”.

“We see exporting coal through our communities as the last gasp of the US coal industry,” says Ms Kearns. “They’re trying to push their dirty product on families abroad.”

Citi forecasts a growing deficit of coal in the Pacific basin starting in 2015, shifting trade flows towards the eastern hemisphere.

But the bank also says that demand growth for thermal coal is in “structural decline”, as emerging economies such as China also adopt stricter environmental rules.

As a result, Citi believes that the compound annual growth rate for thermal coal imports will slow from the 7.1 per cent pace witnessed between 2000 and 2013 to just 2.6 per cent in the next six years.

Source: The Financial Times