Being ranked first is a glorious feeling. Falling to second, as the US coal industry is discovering, is altogether more painful.
Coal has long been the dominant fuel in US electricity production. It accounted for as much as half of power generation as recently as the early and mid-2000s. It will hold the top perch for several more years, but its market share is expected to fall towards 30 per cent as demand for natural gas and renewables grows. Natural gas prices, because of the fracking production boom, have more than halved since 2008. At the same time, coal fired plants are implementing the US Mercury and Air Toxics Standards. Add this all up, and a tenth of coal-fired capacity will be retired in the next few years according to S&P.
But the woes of coal producers go beyond US power production. Coal is also used for metallurgical purposes, in the production of steel. Only about a tenth of US coal production is metallurgical coal but it commands good prices. And while demand for coal for power production (“thermal” coal) has fallen, demand for met coal has traditionally served as a buffer for miners. Not this time. The price of met coal is off a fifth from last year to below $120 per metric tonne. China’s steel industry is slowing and it has slapped tariffs on coal imports.
And so the coalmakers are feeling the pain of this slow decline towards second place. Shares in Arch Coal, Alpha Natural Resources, Walter Energy, Peabody Energy, have halved in the past year. Creditors are scared. In recent weeks Arch, Walter and Peabody have cut or eliminated dividends to preserve cash. Peabody is working with its lenders to loosen the demands of its loans. Arch’s bonds trade below 30 cents on the dollar; last year it was lossmaking before its $400m in interest costs. Painful.
Coal demand may decline, but will not disappear entirely. The same cannot be said of all of the US’s coal producers.
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