The North American coal industry is in transition; a significant decline in domestic consumption means that it is becoming a significant exporter of the fossil fuel to emerging economies, especially those in Asia.
The domestic US coal market has seen a whirlwind decline in recent years as low-cost natural gas from recently embraced hydraulic fracturing has flooded the market, sending the coal market spiralling downward as US coal-fired power generators, which traditionally used about 90% of the local coal production, switched to burning cheaper natural gas.
This has had a devastating effect on coal producers in the US, forcing a number of significant US coal producers, including Arch Coal, Alpha Natural Resources and Peabody Energy, to scale back production or shutter operations in recent months.
The poor market conditions also resulted in a flurry of bankruptcy filings, including Patriot Coal and the reorganisation of junior Cline Mining.
But, investment bank Headwaters MB mining and metals team MD Raymond McCormick tells Mining Weekly the emerging export demand from emerging economies is driving a new chapter in the US coal market.
“The burgeoning industries in China, Japan and India are aiding growth. This represents a great opportunity for US coal markets, but it all depends on whether the US is able to increase its port coal-handling facilities to take advantage of this opportunity,” he said.
McCormick says demand for thermal and coking coal is set to rise. For thermal coal alone, it is estimated there are about 288 GW of new coal-fired power generation capacity under construction globally, which would add about 850-million tons of demand.
Long-term projections made by the US Energy Information Administration (EIA), predicted coal would become the world's primary fuel for electricity generation within the next few years.
“By 2015 it is estimated there will be about 470 GW of coal power generation on line, requiring about 1.4-billion short tons of thermal coal,” he says.
Domestic coal demand is also expected to increase marginally this year, as the price of gas has this year already increased by about 20% year-on-year, making it a sensible move for power producers to once more switch to burning cheaper coal. Natural gas recently traded at $3.87/mmBtu, while Eastern coal was selling at $2.40/mmBtu.
The domestic US coal market, which, according to the World Energy Council’s Survey of Energy Resources 2010, included an estimated 237.29-billion tons or 22.6% of the world’s proven recoverable coal reserves as at the end of 2008, was expected to grow this year to 842-million tons, compared with the 870-million tons in 2012. This compared with a domestic market comprising more than one-billion tons of coal just before the global financial crisis of 2007/08.
For coal prices to really show a northward movement, the industry has to get the total coal inventory down. It was at historically high levels of about 200-million tons in 2012 and McCormick saw an ideal inventory level at about 150-million tons for the market to leverage the best prices.
Recently, the US EIA said the US coal market might have received a small boost from coal supply disruptions in Colombia, which included a strike at its largest exporter, Cerrejon. Force majeure, a contract clause that allows a company to suspend contractual obligations in the face of unexpected events, was declared on several coal shipments destined for markets in Europe and the US.
As a result of the sluggish US economy and lower growth rates from the leading developing countries in recent months, McCormick points out mergers and acquisitions (M&A) in North America have been quite anaemic, with only about 11 notable deals, totalling about $3.2-billion, having taken place in 2012 – half of which took place in Canada.
Between 2008 and 2011, there were about 22 M&A transactions internationally, totalling $75-billion or an average of about $3.3-billion per transaction.
“Equities have taken a beating. Since 2011, of the 11 public coal companies, eight were downgraded and the companies’ combined equities were down by about 50%,” he says.
However, many of the coal companies, including Peabody Energy, Consol Energy and Alpha Natural Resources were sitting on sizeable amounts of cash in the bank and some still managed cash flows of more than a billion dollars a year. McCormick says many of these companies have positioned themselves to weather the market lull and be ready to rapidly increase production when the market revives.
However, many companies have a high debt-to-capital ratio, making cost management critical and asset sales likely as the companies try to reduce their capital burn rate, boost funds and increase cash flows.
“The companies’ priorities at present are to manage capital and conserve cash, while they wait out the storm,” McCormick says.
North American coal producer Alpha Natural Resources in September temporarily idled eight coal mines in Virginia, West Virginia and Pennsylvania, impacting about 1 200 jobs.
The company says it is reshaping its mine operations to reduce the production footprint, as demand for thermal coal continues to decline as thermal power stations switch to cheaper natural gas.
The miner expects its organisational streamlining to result in overhead cost savings of about $150-million, which include the $50-million to $60-million in cost reductions resulting from production cuts from four mines in Kentucky during June 2012, which also cost 150 jobs.
"We're taking a long-term view of the thermal coal market, and we believe there are solid opportunities for diversified suppliers like Alpha to produce and sell thermal coal profitably into a smaller domestic market and to customers in new markets overseas," Alpha CEO Kevin Crutchfield said.
He added, notwithstanding current market softness for metallurgical coal, new steel mills were being planned or under construction in developing areas of Asia, South America and elsewhere, which provided “compelling long-term growth opportunities for Alpha”.
Bankrupt St Louis-based Patriot Coal also cut metallurgical coal production by 85 000 t/m in response to a weakening market demand. The company in July filed for US Chapter 11 bankruptcy protection when coal prices continued to plummet, owing to electricity producers switching to cheaper natural gas.
In Canada, the country’s largest diversified miner Teck Resources says coal production for the fourth quarter ended December 31 decreased by 5% compared with the same quarter in 2011, mainly as a result of the company’s decision to reduce production starting in mid-August, through to the end of the year, to align with reduced customer demand. This was despite more production capacity coming on stream.
“Due to uncertain global economic conditions, prices for all of our major products were down compared to last year, which resulted in lower earnings and cash flows than in 2011,” Teck CEO Don Lindsay said.
Canadian coal handler Westshore Terminals, which has coal export facilities on the West Coast, said it expected export volumes to remain relatively flat, although it was busy with infrastructure upgrades in anticipation of increased exports in the medium term.
Canada’s coal mining industry contributed about $5.2-billion to the country’s gross domestic product (GDP) in 2011, a report released late in 2012 by PricewaterhouseCoopers (PwC) has found.
The report, commissioned by the Coal Association of Canada (CAC), revealed that coal delivered more economic and social benefits than expected, and included $3.2-billion in direct impacts and $2-billion in indirect impacts. The industry was also a positive contributor to Canada’s trade balance, created employment and, therefore, benefited communities.
In contrast to the US coal market, Canada’s coal sector has experienced strong revenue growth and capital investment in recent years, and increased demand for metallurgical coal in emerging Asian economies, coupled with rising energy prices, resulted in revenue growing by an average of 15% a year between 2001 and 2010.
Capital investment rose by almost 20% a year on average during the same timeframe.
“PwC’s research showed coal consumption in developed countries has remained stable over the last decade, but coal consumption in emerging economies has doubled and is trending upwards. If these consumption trends continue, we expect coal prices to continue above historic levels,” PwC director of economics and statistics and report author Janice Plumstead said.
Along with its contribution to Canada’s GDP and export trade, the report found the coal industry benefited Canadians by directly or indirectly employing 42 000 people in the coal industry. This included those who work in mine production, construction, exploration, transportation and reclamation activities, as well as those who supplied goods and services to the industry.
Since 2004, employment in the coal sector had been steadily increasing and accounted for 14% of total mining employment. Average coal industry salaries were more than double the average national wage and increased by 37% between 2001 and 2010.
Along with employment, Canadians directly benefited from the coal industry through the royalties coal companies paid to governments. In addition to royalties exceeding $300-million a year, additional economic impacts on government revenues in 2011 were estimated at $698-million, which was available to fund public infrastructure, such as roads, hospitals, schools and government programmes.
The report found Canada had about 6.6-billion tons of recoverable coal reserves as at 2009, which was the latest year for which complete information was available. These reserves are mainly located in British Columbia, Alberta, Saskatchewan and Nova Scotia.
The reserves comprised about 53% of bituminous coal and 47% sub-bituminous and lignite coal. The report found the country had recoverable coal reserves to support about another 100 years of future production and PwC said Canada’s coal potential could be even larger with a broader measure of coal resources in place estimated at 190-billion tons.
Canada produces 60-million tons of metallurgical and thermal coal a year, the value of which reached $7-billion in 2011, with Alberta accounting for about 50% of the production in 2010, followed by British Columbia, with 27-million tons and Saskatchewan with almost ten-million tons.
The sales value of exported metallurgical coal was found to have totalled $8-billion in 2011, representing almost 40% of coal produced in Canada.
“Coal has always played an important role in contributing to Canada’s economic strength; however, this report helps to confirm the profound impacts the coal industry has on our economy and our communities through employment, taxes and royalties to governments and regional expenditures,” CAC president Ann Marie Hann said.
Headwaters’ McCormick points out that companies with coal projects and/or mines were increasingly facing a regulatory and environmental onslaught as anti-fossil fuel and environmental concerns grow.
He says it is a permitting nightmare to open new ports or enlarge existing facilities in the US, which are seen as particularly critical for the West Coast to take advantage of the expanding export market. Exports present an opportunity for US coal producers to shift away from a declining domestic market that has been hindered by regulation as well as competition from natural gas.
US port infrastructure is already struggling to keep pace with the demand, with six US ports accounting for about 94% of coal exports.
Arch Coal was one company preparing to take advantage of the emerging seaborne markets. CEO John Eaves said the company was directing its sales to the seaborne coal trade owing to its belief that this was where the growth would be.
“We see exports as a long-term development opportunity, allowing us to diversify our customer base and unlock further value inherent in our metallurgical and thermal coal reserves. The export market also will help us offset our expectation for significant, but flat, coal demand on the domestic front,” he said in the company’s newly published year report.
To support this strategy, Arch is expanding its access to port infrastructure, including advancing the development of an export facility in the state of Washington. The company has also locked up throughput capacity in Canada to move its Powder River basin coal to the large and fast-growing coal markets of the Pacific Rim.
Meanwhile, civil resistance to coal mining, had forced bankrupt US coal miner Patriot Coal to last year become the first miner to cease large-scale mountaintop-removal coal mining in central Appalachia in exchange for more time to comply with the Clean Water Act at several of its central Appalachian mines.
As the company is preparing for Chapter 11 litigation, it has reached an agreement with three environmental groups that sued over water pollution from its West Virginia operations.