Guest post by David Middleton
America’s Biggest Coal Miner Is Joining the Comeback Under Trump
by Tim Loh
April 3, 2017, 4:28 PM CDT April 4, 2017, 1:14 PM CDT
- Peabody is following rival Arch Coal out of bankruptcy
- The coal miner has for decades served as industry’s bellwether
Peabody Energy Corp., America’s largest coal miner, is back.
After almost a year in bankruptcy, the St. Louis-based giant began trading again on the New York Stock Exchange on Tuesday. Its return to Wall Street comes as the entire U.S. coal sector is staging a comeback amid growing interest from investors.
Peabody’s relisting comes just months after rival Arch Coal Inc. emerged from bankruptcy. Miner Ramaco Resources Inc. held the industry’s first initial public offering in two years. And Warrior Met Coal LLC is planning its own. They’re all riding a rally in coal prices, which skyrocketed last year after China decided to cut its output. U.S. natural gas futures have meanwhile climbed, making coal a more attractive alternative for power generators, as Trump begins rolling back regulations on the industry in a bid to bring mining jobs back.
The industry’s recovering from a market collapse that, just a year ago, sent coal prices plunging to their lowest level in over a decade. The downturn forced shut hundreds of U.S. mines, leaving thousands out of work. Peabody, which produces more tons of coal than any other U.S. miner, is returning with about a quarter of its old debt levels and plans to focus on the thermal coal used by power plants — a fuel it can extract from mines in Wyoming and Australia that analysts including Clarksons Platou have ranked among the world’s lowest-cost operations.
Kellow credited Trump’s initiatives, including an executive order repealing one of Barack Obama’s signature environmental measures, with affirming coal’s place in the nation’s energy mix. Eventually, policies out of Washington may delay or defer the expected closing of 50 gigawatts of coal-fired power plant capacity, Kellow said.
“A lot of the regulatory efforts that we’ve seen to date have focused on both job protection and laying the foundation for future growth in jobs,” Kellow said. “I mentioned the 50 gigawatts coming out of the system. The foundation is there to potentially delay or defer or turn that around. That would be the driver of jobs.”
Metallurgical coal rallied by the most in four years after damage from Tropical Cyclone Debbie hit shipments from Australia, the world’s largest producer of the steelmaking component. Spot prices rose 0.6 percent to $176.80 a metric ton Tuesday, after soaring 15 percent a day earlier, according to The Steel Index. Monday’s jump was the biggest daily gain in data going back to May 2013. Thermal coal gained 6.2 percent to $88.05 a ton on Monday.
Peabody may chart a conservative path forward, focusing on keeping debt levels low and staying profitable, Jeremy Sussman, an analyst at Clarksons, said in a note. That means avoiding decisions like a 2011 one to spend $4 billion to acquire Australia’s MacArthur Coal Ltd., an ill-timed, debt-fueled bet that metallurgical coal prices would stay high. Prices promptly crashed, ultimately driving Peabody into bankruptcy.
U.S. coal production plunged by almost 40 percent under President Barack Obama as the industry faced competition from cheap gas and pressure from tighter regulations on pollution from power plants. Trump has already begun lifting regulations on the coal sector, including a ban on leasing on federal land. He promised during his campaign to bring back mining jobs, a prediction even coal companies have hedged.
“It’s not going to bring back jobs right away,” Robert Murray, the CEO of miner Murray Energy Corp., said of Trump’s initiatives in an interview last month.
Of course the naysayers respond with:
But, they miss the point. The resurgence of the U.S. coal industry isn’t based on a resurgent domestic demand for coal as a power plant fuel.
Big Coal: Don’t Call It a Comeback
By Liam Denning
Interviewed at Bloomberg headquarters on Tuesday, CEO Glenn Kellow, to his credit, didn’t try to spin a story of resurgent coal demand. Instead, his mantra is one of keeping costs down, taking opportunities to expand market share, keeping debt manageable and distributing cash to shareholders.
Peabody will also seek to reap the occasional windfall from more volatile international metallurgical coal prices via its Australian assets. In other words, blocking and tackling in a commodity market that is, by and large, not growing much and still facing big challenges.
One of the more telling moments during Tuesday’s interview came toward the beginning, when Kellow was summarizing the events around Peabody’s descent into chapter 11. He noted that, around the same time, U.S. natural gas prices hit a low of $1.67 per million BTUs. He was off by a few a cents — as he acknowledged he might be — at least according to Bloomberg data. Whatever; the point is that the CEO of a coal-mining company who quotes historical natural-gas prices down to the cent clearly knows the enemy.
As I’ve written here and here, the shale boom fracked the ground from underneath the U.S. coal sector. The industry simultaneously self-administered a coup de grâce in the form of ill-timed acquisitions, loading up with debt just as the market went south. President Barack Obama’s tightening of the regulatory screws on coal-fired power essentially closed the door on any revival.
The loosening of those screws doesn’t presage a coal renaissance. Which is why Kellow stresses the competitiveness of Peabody’s coal assets, particularly its mines in the Powder River and Illinois basins. These inland sources of supply enjoy lower costs than Appalachian coal, making them better able to compete with gas in the all-important power-generation sector.
In the chart below, I’ve calculated the price at which generic Powder River Basin coal can be competitive with gas at various price levels:
Those are theoretical numbers, but it’s clear what Peabody is up against. Natural gas futures over the next five years average just $2.97.
Kellow is optimistic the Clean Power Plan’s demise will keep some coal-fired units open that might otherwise have closed. He hopes this will also mean those remaining open will run for more hours every year, pushing utilization up from 50 percent or so to more like 70 percent.
The resurgence is due to the industry making itself more competitive, in much the same manner that the shale oil & gas players made themselves more competitive in response to a collapse in commodities prices.
The Market for Coal
The demise of the Clean Power Plan (CPP) leads to a 30% increase in U.S. coal demand by 2030 (relative to the expected demand under the CPP):
Coal demand may not be resurgent in the U.S., but it continues to grow in the non-OECD world.
Chapter 4. Coal
In the IEO2016 Reference case, coal remains the second-largest energy source worldwide—behind petroleum and other liquids—until 2030. From 2030 through 2040, it is the third-largest energy source, behind both liquid fuels and natural gas. World coal consumption increases from 2012 to 2040 at an average rate of 0.6%/year, from 153 quadrillion Btu in 2012 to 169 quadrillion Btu in 2020 and to 180 quadrillion Btu in 2040.
The coal industry can also take advantage of “climate change” (wink,wink, nudge, nudge):
After Cyclone Debbie, China replaces Australian coal with US cargoes
Tuesday, 4 Apr 2017 | 8:52 PM ET
China, the world’s biggest coking coal importer, is scrambling to cover Australian supply disruptions after Cyclone Debbie knocked out mines and rails by turning to an unusual source: the United States.
Debbie, which hit Australia‘s Queensland state last week, caused the evacuation of several mines and damaged coal trains supplying export terminals, triggering two miners – Yancoal Australia and QCoal – to declare force majeure on its deliveries. With other miners like BHP Billiton and Glencore also affected by the storm’s fallout, more disruptions may follow.
Force majeure is a commercial term that means a buyer or seller cannot fulfill their obligations because of outside forces. It is typically invoked after natural disasters or accidents.
Australia is the world’s biggest coking coal exporter and is China’s largest supplier. With markets there closed on Monday and Tuesday, its steel makers are clambering to find alternative supplies.
“Markets may be closed Monday and Tuesday but there’s certainly activity. The Chinese are fixing cargoes from the United States in order to replace the shortfall from Australia,” one coal trader with knowledge of the matter said, speaking on the condition of anonymity as he was not cleared to talk about commercial deals.
“More will make its way from the U.S. to China very soon,” he said.
China will remain a huge market for coal for a very long time:
China Ramps Up Coal Power Capacity As UN Climate Talks Kick Off
2:21 PM 11/07/2016
China’s government announced plans to increase the country’s coal-fired power capacity by as much as 20 percent over the next four years as United Nations delegates meet in Morocco to implement a major global warming agreement.
China’s new five-year plan would “raise coal-fired power capacity from around 900 gigawatts last year to as high as 1,100 gigawatts by 2020,” which is “more than the total power capacity of Canada,” according to The Wall Street Journal.
Officials said they would increase the percentage of its electricity mix it gets from non-fossil fuel sources to 15 percent by 2020. Coal’s share of electricity production would fall to 55 percent, down from more than 65 percent in recent years, though coal-fired power use could rise in absolute terms.
China consumes as much coal as the rest of the world combined.
China only agreed to sign on to the Paris sham if they didn’t have to begin to decarbonize until after 2030.
Mr. Xi said China would brake the rapid rise in its carbon dioxide emissions, so that they peak “around 2030” and then remain steady or begin to decline. And by then, he promised, 20 percent of China’s energy will be renewable. Analysts said that achieving those goals would require sustained efforts by Beijing to curb the country’s addiction to coal and greatly increase its commitment to energy sources that do not depend on fossil fuels.
And the Trump administration is committed to clearing the obstacles in the way of ramping up coal exports:
DECEMBER 15, 2016 12:10 PM
Trump’s Interior pick could signal revival of Northwest coal export terminal
Donald Trump’s nomination of Montana Rep. Ryan Zinke to lead the Interior Department could signal the revival of a much-debated coal-export terminal in Northwest Washington state that’s pitted industry groups and unions against environmental and community groups, and two Indian tribes against each other.
In Congress, Zinke has been a staunch supporter of the Gateway Pacific Terminal, a $600 million facility in Whatcom County, Wash., that would export about 48 million tons a year of coal mined in western states to Pacific Rim markets.
Zinke also wants to lift a moratorium on new leases for coal extraction on federal lands, 90 percent of which takes place in the Powder River Basin in Wyoming and Montana.
Competition With Natural Gas
The naysayers generally follow up their “no demand” argument with a “natural gas is cheaper than coal” argument. As Mr. Denning noted, coal is competitive when natural gas prices are above $2.50/mmbtu. Natural gas is very cheap right now. However, it has been rising for more than a year:
The shale boom led to an oversupply and a collapse in natural gas prices over the past decade. Much of this was due to the fact that oil prices remained high until late 2014. Liquid-rich gas was economic at very low gas prices with oil trading at >$100/bbl. The natural gas glut will soon come to an end:
Natural gas oversupply will not last forever: Industry executives
Huileng Tan | Akiko Fujita
Monday, 3 Apr 2017 | 11:02 PM ET
The natural gas industry has been plagued by low prices on the back of massive supplies from mega-projects coming online and low oil prices, but there may well be not enough output to meet growing demand in the longer term, industry executives said Tuesday.
“The industry needs extra supply by the middle of 2022, 2023,” said Jordan Cove LNG president, Elizabeth Spomer.
Current low prices and supply surplus sparks a cycle of slowing production amid growing demand, which will contribute to a future output deficit, she pointed out.
U.S. natural gas prices priced at the benchmark Henry Hub are around $3.15 per million British thermal units (mmBtu), 11 percent lower from a year ago.
Spot prices in Asia for liquefied natural gas (LNG) are above $5 per mmBtu currently and trend higher during winter demand, drawing shipment from the U.S. among other markets. However, Asian buyers have previously preferred longer-term contracts for supply security.
That is the case as well with demand up and coming in China where there is a government push to replace coal-fired plants with cleaner gas-powered electricity plants so as to curb air pollution.
Big buyers are also emerging from the Middle East, Pakistan and Bangladesh will soak up production from projects coming online in Australia and the U.S., said Spomer who was speaking to CNBC on the sidelines of the Gastech conference in the Japanese city of Chiba.
“It takes a while to build these things,” she added.
The U.S. coal industry is doing exactly what the oil & gas industry did from 2014-2016. In the face of oversupply relative to demand and a collapsing commodity price, the industry is making itself “leaner and meaner.” Mr. Denning referred to natural gas as the “enemy” of coal. That’s funny, I find oil & gas for a living and have never thought of coal or nuclear power as enemies. Fair competition is good for business… And as an electricity consumer, I don’t like paying more than 10¢ per kWh for electricity.
Natural gas prices are unlikely to remain this low for very long. $2.50/mmbtu is uneconomic in most of the shale plays and very uneconomic in the Gulf of Mexico, except on a cost-forward basis. When natural gas production and consumption come back into balance, it will probably be at a price of $3.50 to $5.00/mmbtu. Coal is very competitive with natural gas above $3.50/mmbtu.