Oil, natural gas, and alternatives dominate the headlines when it comes to energy. But there's a big and largely-overlooked revolution occurring with the energy source likely to become the most preferred fuel for a world in economic decline: coal.
The United States coal sector has been hit very, very hard this spring. Demand has been crushed by over 10%, as warm weather and bountiful supplies of cheap natural gas have induced power plant operators and all other users where possible to switch away from domestic coal. The rapid change in fortune has sent the stock prices of big, listed names such as Peabody and Arch down by double digit percentages, as the Dow Jones US Coal Index has fallen below 160 from above 225 at the start of 2012.
Central Appalachian thermal coal futures, the US benchmark, averaged $60.20 during the first quarter, down from an average of $73.58 in the year ago period and down from a high of $143.25 in July 2008. “It’s like a perfect storm,” Mann said. “The three main challenges are the really mild winter, a lethargic economy and on top of that, with gas prices being so low, those utilities that can burn gas have opted to burn gas instead of coal because gas is so cheap.” Cheap gas has undercut power producers’ revenues because it drives down wholesale electricity prices, squeezing margins for plants that run on nuclear, renewable and coal power. Moody’s Investors Service changed its outlook for the US coal industry to “negative” from “stable” on May 7, citing weak prices and a drop in power demand, and said it expects a 5% decline in prices for coal deliveries in 2013. The U.S. Energy Information Administration expects the industry to see a 10.9% decline in coal consumption this year and Moody’s expects US coal demand from power plants to plunge by 100 million tons by 2020, the ratings company said in the report.
Given the rather weak near-term and long-term outlook for US coal demand, it’s not surprising that within such a capital-intensive business, a number of smaller coal producers were hit recently with bankruptcy rumors. Indeed, even large cap names like Arch Coal have seen an escalation of concern over debt levels. Accordingly, many have concluded that coal – in an era of solar, wind, and natural gas – has finally displaced itself due to its problematic extraction, distant transportation, and overall costs. Is coal finally going away as an energy source?
Not a chance.
Indeed, everything currently unfolding for coal in the United States is precisely what is not unfolding for coal globally. Prices to import natural gas to most countries via LNG remain sky-high, easily protecting coal’s cost advantage. And the demand for coal in the developing world remains gargantuan. Accordingly, just as with oil, lower US demand simply frees up supply to elsewhere in the world.
The global coal juggernaut rolls onward.
Soaring US Exports
In the same way that falling US oil consumption has freed up global supply, so now is US declining coal demand freeing up production for export. Last year marked a twenty-year high in US coal exports:
For the full year of 2011, the US exported 107,259 thousand short tons of coal. This was the highest level of coal exports since 1991. More impressive: exports recorded a more than 25% leap compared to the previous year, 2010. (see data here, opens to PDF). Additionally, this was also a dramatic breakout in volume from the previous decade, which ranged from 40,000 – 80,000 thousand short tons per annum.
The United States remains a large consumer of coal, and currently places second, behind China, in the top global users, which I call the Coal 7: China, USA, India, Japan, Russia, South Africa, and Germany. Accordingly, this means that the US, which currently consumes about 15% of total global demand, is about to become a marginal new source of global supply.
Although most grades of coal are still trading at a cheaper price level than a similar equivalent amount of BTUs sourced from natural gas, the all-in costs of burning coal in the United States given our regulatory framework is now higher than burning natural gas. In one sense, this is not a new story. Indeed, the advent of the Environmental Protection Agency in 1970 and the historic wave of pollution regulations set the United States on a course away from coal and towards natural gas over 40 years ago. Even the coal industry is eager to advertise the long decline of coal-fired pollution (as a portion of the whole) in the United States, which is due overall to an increase in emissions control, but is mostly the result of the rise of natural-gas-fired power since the early 1970s.