September 12, 2012 12:16 am

Coal: Burning ambition might not lead to a happy ending

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Mitt Romney, the Republican presidential candidate, and other members of his party like to accuse Barack Obama, the US president, of waging a “war on coal”.

The US coal industry must feel at times as if the whole world has taken up arms against it.

It is true that the Obama administration has taken a generally hostile stance towards coal. The Environmental Protection Agency (EPA) has been attempting to push ahead with several curbs on the pollution emitted by coal-fired plants, which it has argued would save tens of thousands of lives through reductions in respiratory illnesses. To the extent that the regulations curb the use of coal, they would also cut emissions of carbon dioxide, which is believed by most scientists to contribute to global warming.

However, environmental regulations are far from the only, or even the principal, cause of the decline in US coal demand. Responsibility for that lies in the boom in North American natural gas production and the consequent fall in prices, which has made it difficult for even the lowest-cost coal to compete.

The share of US electricity supply coming from coal plants has fallen to its lowest level in almost 40 years, and at times this year coal has lost its position as the country’s principal source of power, falling behind gas.

Production from the US coal industry – by far the largest in the Americas – has fallen 8 per cent since 2008 to 266m tons in the first quarter of 2012.

The industry won a tactical victory in its struggle with the EPA last month when the District of Columbia appeals court struck down the Cross-State Air Pollution Rule, which had set tight limits on pollution from burning coal. The EPA was forced, for the time being, to stick to a less demanding standard.

However, analysts argue, the case, brought by power generation companies with coal-fired plants, might have only a marginal effect on the rate at which those plants are closing. In part that is because there is another potentially highly significant rule soon to take effect: the “maximum achievable control technology” stipulation for curbing emissions of mercury and other poisons from burning coal. These take effect from the middle of the decade and will force some generators to either invest in pricey emissions reducing equipment, or close their coal plants.

It is also because, even in the past year, expectations have shifted in the direction of gas as staying lower for longer.

The costs of US mines vary according to where they are. Underground mines in the Appalachia region to the east of the country typically have costs of about $70-$75 per ton, according to Jonathan Beigle, a researcher at Manning & Napier, the asset manager, while costs for open mines in the Powder River Basin, centred in Wyoming, are about $10-$13 per tonne.

As a result, Mr Beigle argues, Powder River Basin coal can compete effectively against gas-fired generation with gas at any price above about $2.75 per million British thermal units, in line with the month-ahead price of about $2.0 in early September. However Appalachian coal, he suggests, needs a gas price of $4.50-$5 before it will start to look commercially viable again. Manning & Napier is a shareholder in a company operating in the PRB region.

To cope with the weakness of their domestic market, US coal producers have been turning to export markets. US coals sales overseas have been soaring, particularly in Europe. Last year US coal exports were at their highest since 1981.

However, the eurozone crisis, the slowdown in China and other emerging economies, and the arrival on to the market of increased supplies from competitors such as Indonesia, have put that export success under threat.

Expanded infrastructure – particularly rail capacity and port facilities on the west coast to make it easier to deliver to China and other Asian markets – would be vital for sustaining the growth of US coal exports, and have been bitterly opposed by environmental campaigners for that reason. But there have been signs that the investment in that infrastructure is flagging. In August, RailAmerica announced that it had abandoned its plan to build a coal export facility on the coast of Washington state.

If China is heading into a cyclical slowdown, that will delay rather than finish its need for increased energy supplies. The forces driving the country’s development, including urbanisation and the rise of the middle class, point towards strong long-term growth in its demand for power.

However, Daniel Gabaldon, a principal in Boston Consulting Group’s Washington office, warns that the US coal industry cannot necessarily rely on exports to save it. China and many other countries are eagerly pursuing shale revolutions of their own to deliver the same cheap gas now produced in the US.

“It’s not clear that there will be a happy ending for coal mining,” Mr Gabaldon says. “The potential for the rise of natural gas to affect the coal industry will take a while to work through fully. But it certainly has the potential to affect the global market, just as it has in the US.”

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