Exports Dip, But Coal Remains King

The U.S. coal industry — faced with new environmental regulations and competition in the generation market from low cost natural gas — turned to exporting coal to keep as many mines open and workers employed as possible. But that too has taken a downturn with coal exports expected to be 8.5 percent less this year than last year’s record of 125.7 million short tons.[i] The main reason for the downturn is believed to be softening demand growth in China. But, other factors such as calls by President Obama, the World Bank, and the European Investment Bank to no longer fund coal plants overseas except in rare cases also contributed.[ii] Despite all this, the International Energy Agency is forecasting that coal will overtake oil as the world’s major fuel source by 2017 and the Energy Information Administration predicts continued strong growth in global coal consumption through 2040.

China’s Softening Coal Demand

China has taken steps to limit the growth of coal imports including modernizing its coal mines, increasing the efficiency of its coal-fired power plants, and moving towards more nuclear and renewable power in cities where air pollution is a major factor.

For most of the last decade, China accounted for more than 50 percent of world coal demand, driving up international coal prices and stimulating mining activity across Australia, Indonesia, Colombia, and South Africa. However, in order to control criteria pollutants that plague China’s large cities with air pollution[iii], China has banned building new coal-fired plants around its 3 major cities: Beijing, Shanghai, and Guangzhou, in favor of natural gas, nuclear, and solar power.  Also because of slowing Chinese economic growth, the expected demand for increasing coal imports has not materialized. An oversupply of coal on the world market resulted in a 30 percent drop in world coal prices from last year. As a result, coal exporting companies from the Pacific to the Gulf of Mexico have reduced mining operations and shelved some export projects, particularly for thermal coal used to produce electricity.[iv]

But, China’s thirst for coal remains very large. China produces the most coal of any country in the world, a staggering 4 billion tons a year, 4 times what the United States produces, but still has to import coal to supply its huge domestic coal demand.[v] Some analysts, however, predict that by 2015, China will no longer need to import coal, relying on its own large domestic resources.

Impact on the U.S. Coal Export Market

With Australia and Indonesia supplying coal to China, South Korea and Japan looked increasingly to the United States for future coal supplies. Asian interest in U.S. coal stimulated interest in building coal export terminals in Oregon and Washington State and on the coast of the Gulf of Mexico. At the beginning of 2012, the U.S. coal industry had plans to expand port capacity by an additional 185 million tons. But the collapse in coal export prices and the slowing in demand have caused several planned export terminals in the Pacific Northwest and in the Gulf of Mexico to be canceled over the last year. It is not just poor economics, however, that curtailed these coal export terminals, but also political opposition.

Currently, there are no U.S. coal export facilities on the West Coast, and U.S. coal exports to Asia have been shipped from terminals in British Columbia. Six new West Coast coal export terminals were proposed over the past several years to move U.S. coal to Asian markets; three of which have been curtailed. The three remaining export terminals, in Cherry Point, Washington; Longview, Washington; and Boardman, Oregon, would have the capacity to ship close to 120 million tons of coal per year.  These 3 terminals are expected to ship 70 percent of the 170 million tons of coal projected for the 6 original proposed terminals, according to a report, “Heavy Traffic Ahead,” that was prepared last summer.[vi] The report projected that the 6 terminals would mean an additional 57 coal trains passing through Billings, Montana on average every day. The 3 remaining proposed coal export terminals are expected to increase freight train traffic in Billings by roughly triple from what it is today,[vii] causing congestion for local traffic.

But, besides the increased rail traffic, opponents are arguing that the region should not be in the business of exporting a resource that they say is a major contributor to global warming,[viii] despite the fact that the importing countries will continue to burn coal—either domestic coal or coal imported from other countries besides the United States.

U.S. coal companies are still pursuing these export terminals because forecasters see coal use expanding globally despite efforts by environmentalists to curtail its use. The International Energy Agency expects coal to surpass oil as the world’s major fuel by 2017.[ix] The Energy Information Administration predicts that global coal consumption will increase by almost 50 percent by 2040, with China’s consumption increasing 75 percent, India’s consumption increasing 78 percent, and Africa’s increasing 70 percent.[x]

Impact on U.S. Coal Leases

Coal’s dismal domestic outlook due to slumping coal export markets and increased environmental regulations from the Obama Administration resulted in no bids at a recent lease sale on federal coal land in Wyoming—the first time ever that no bids were received. In August, Cloud Peak Energy surprised many by not bidding to develop 145 million tons of federal coal adjacent to its Cordero Rojo site in Wyoming. According to Rick Curtsinger, a Cloud Peak spokesman, the decision not to bid on the coal reflected concerns about the ability to profitably mine the coal for sale to U.S. power producers, which would be the primary market for Wyoming coal. The company is telling us that because of coal’s poor domestic outlook, it chose not to bid. The Obama Administration’s “war on coal” through over regulation is having some unpleasant effects, which in addition to lost job opportunities,  is reduced revenue from coal lease sales, which means less money for the U.S. Treasury and the states.

Conclusion

U.S. coal companies turned to coal exports to keep mines open and workers employed, but a slump in that market largely due to an oversupply and slower than expected growth in China has resulted in lower projected exports for this year compared to last year’s record. Regardless, coal companies expect the world coal market to change and are trying to develop three export terminals on the West Coast where no terminals exist today to allow coal to be exported to growing Asian markets in the future. Unfortunately, opposition from increased rail traffic and environmentalists who argue irrationally that these exports will increase global climate change are making problems for their development. Global coal use will increase whether or not the U.S. coal industry benefits, but the Obama Administration’s “war on coal” means more unemployment to come for the U.S. mining industry and less coal revenues for the U.S. Treasury.