Coal’s Collapse – 2/29/16

Coal’s collapse is a matter of where, when, and how. Though the where might stay contained to developed nations with capital to spare and strong environmentalist lobby groups, the risk of substitution throughout the world is becoming more feasible as costs of alternatives fall and countries weigh the negative externalities of emissions more heavily. When seems to get closer every day as coal companies see profit margins falling, burdensome regulation rising, and prospects for new mining and power capacity dimming. The how will vary from country to country and company to company in the magnitude of disruption.

The fall in Chinese consumption of coal has been devastating for coal prices and profit margins at some of the world’s largest trading and mining companies. China’s recent commitment to cutting pollution and, by extension, some coal types sets a negative tone for the country, which accounted for around half of global demand before imports of coal dropped nearly 30% in 2015  Noble Group, a major commodities trader, recently admitted the long term picture for coal is not good. The company cut its five-year forecast for coal from $85 per metric ton to $55 after factoring in the recent climate-change agreement in Paris as well as the “lower for longer” mentality for oil prices. With the fall in the price of coal, go too the profit margins as many firms report their worst performance in recent history.

Coal’s problems with China will only continue if Chinese coal companies successfully lobby for a domestic price floor. The proposal for a floor to protect against bankruptcy and prevent job cuts would be another market distortion likely causing subsidized Chinese coal to flood foreign markets much as its steel and oil products have. Since the central government has made plans to reduce overcapacity and eliminate as much as 500 million tons of annual output in 3-5 years, the actual chances of it agreeing to such a measure is unlikely. Still, provincial officials are likely to resist cuts that would create social unrest and eat into their tax revenues.

In the US, regulatory and economic pressures are putting coal-fired power plants on the spot. A case in which American Electric Power Co. and FirstEnergy Corp. defend a plan to keep money-losing coal plants in Ohio open by increasing utility bills has come under review by the state’s consumer watchdog. Utility owners claim that increase in bills to keep uneconomic plants in operation will result in long-run savings as well as preserved tax revenue and jobs. Critics of the plan say that it is basically a subsidy for inefficient, dirty generators. The bailout plan coming under fire may be representative of a more hostile politic environment for coal as the EPA steps up emissions regulation. Compliance costs lower profitability and demand for the already depressed coal sector.

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