Coal: An Industry on the Rocks – 3/21/16

The coal industry continues struggling to stay relevant; it fights a losing battle against a variety of cheaper, cleaner alternative fossil and alternative fuel sources, the most prominent being natural gas and wind, as well as solar.

Flagging growth of coal demand in developing countries, lower commodity prices, and increased competition from other electricity sources have had a significant impact on coal producers.

China is tackling rampant overcapacity in its steel industry and the air pollution caused by coal-fired power plants, the world’s most populous is no longer the reliable consumer of coal it once was. In fact, the slowdown in China has likely forced its trading partners to cut back on coal as well since countries like Australia that once provided iron ore are burning less coal to fuel their own industrial activity. The decreased demand, in turn, drives prices downward making it harder to profit from selling coal.

In addition, as developed countries in Europe and Asia push forward with policies encouraging electricity generation via renewable energy, old customers of the coal industry need to be replaced with less reliable buyers. As seen in the figure below, the United Kingdom is ordering less coal from the US just as India is ordering more. Like many European nations, the UK has been aggressively supporting clean energy technologies like offshore wind.

Coal exports

Competition with natural gas and the burden of new environmental regulations are having a particularly noticeable effect on the electricity generating capacity of the US. Of the 18 GW of capacity put out of commission in 2015, almost 14 GW was older, dirtier conventional steam coal generation. According to the EIA, about 30% of the coal capacity retired in 2015 did so in April, just when the EPA’s Mercury and Air Toxics Standards (MATS) rule went into effect. The amount of coal capacity retired in 2015 was about 4.6% of the nation’s coal capacity at the beginning of that year.

Coal retired

coal by state

Coal’s share of US power generation has fallen precipitously since mid-2015 when it was tied with natural gas. Coal regained some of its generation share in 2013 and 2014; however, a return to lower natural gas prices in 2015 sent coal’s generation share into a nosedive again. A general acceptance that oil and gas prices will remain low combined with worries about the emissions cuts required under the Clean Power Plan has led many major generators to close coal in favor of cheaper, cleaner natural gas-fired plants. In a few years, even renewables could surpass the once dominant fuel if it continues its current downward trajectory.

Natural gas surpasses coal

As evidence of calamity facing coal, Peabody Energy Corp., the largest U.S. coal miner, announced this week that it may seek bankruptcy protection as it struggles to meet debt obligations under current market conditions. It would be joining rivals Alpha Natural Resources Inc. and Arch Coal Inc. Another recent event casting a dark shadow over the industry is the announcement of JPMorgan Chase that it would no longer finance new coal-fired power plants in the US, adding its name to companies issuing similar statements like Bank of America, Citigroup and Morgan Stanley.

Meanwhile, Australian, European, and Asian generators are also facing challenges to coal reliance. AGL Energy Ltd., Australia’s largest electricity producer, is openly considering closing coal-fired power plants to make room for wind and solar farms as part of industry-funded auctions held by the government. AGL was Australia’s biggest greenhouse-gas emitter in 2014-2015 but is now expanding in clean energy in an effort to replace electricity from fossil fuels. In Poland, Energa SA, a major state-controlled uility, has seen large losses and plummeting shares even after the cabinet of Beata Szydlo won last year’s ballot after promising not to close mines and to keep the country dependent on coal for decades to come.

Investors are increasingly skeptical of the government’s ability to fulfill such a promise given the relatively high cost of coal relative to competing fuel sources.  In Asia, Chinese coal miner Heilongjiang Longmay Mining Holding Group, the biggest coking coal company in northeast China, is on the verge of default unless it receives another bailout from local authorities. The response of officials to the state-owned enterprise’s peril will indicate whether the central government will commit to cutting industrial overcapacity or seek to avoid the instability associated with the necessary mass layoffs.

Print Friendly, PDF & Email

Comments are closed.