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Coal industry on the cusp

As global energy policy moves to a greener footing, coal continues to be a vital energy resource in the short term.

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Global coal is on the cusp of a diverging era in which the developed world shifts closer to a carbon-neutral future and the emerging nations continue to harness cheap and plentiful fossil fuels to power their economic take-offs.

 

The transition will be defined by the intricacies of geopolitics, prices and public opinion. Paradoxically, Western policymakers in the short term are using coal as a stopgap resource as they establish a ‘greener’ footing. Meanwhile, for the emerging world, from India to China and beyond, coal remains central to plans for economic growth.


Investment in infrastructure to produce energy from coal is also bifurcating. In the rich nations, cleaner, more technologically advanced assets are replacing older, more polluting power plants. This new generation of power stations is catering for provisional energy needs, on the road to a less fossil fuel-dependent future.


Stranded assets


However, these investments are increasingly viewed as ‘stranded assets’ in waiting, as alternative sources become established. In the developing world, modern coal-fired power stations are being built to expand capacity, rather than upgrade ageing assets. Meanwhile, energy-intensive steelmakers continue to rely on the global transport of coke.

 

Despite the slowdown of China’s economic growth and the sluggish performance of the global economy, investment continues in coal mining and transport to secure cheap and plentiful coal supplies and economies of scale.


For the bulk handling sector, the locus of activity has shifted to coal users in the emerging markets, such as India, and producers and exporters in the resource-rich developed nations, such as Australia and the US, as well as developing economies.

 

Meanwhile, uncertainty hangs over the longer-term future of coal trades in the developed world and the extent to which alternatives can fill their place.

 

End of coal?


Coal’s future was centre stage at the United Nations Climate Change Conference in Paris in December. Amid the push for a phase-out of fossil fuels, developing economies, such as India, voiced the need for coal to provide energy for growing populations and industry. But, with a global framework agreed, lobbyists, such as Euracoal secretary general Brian Ricketts, believe the sector faces an existential threat.


The UN accord has also come amid wider challenges for coal. China’s economic slowdown and the US switch to natural gas have created a global oversupply. The price of thermal coal, used for power generation, has fallen 70% since 2011 – paradoxically, reinforcing the argument for coal as a cheap and plentiful resource. Global seaborne thermal exports fell 5% and imports shrunk 10% last year, according to Deutsche Bank.


In Australia, the response of the big miners, BHP Billiton and Rio Tinto, to the fall in prices and rise in public opposition to fossil fuels has been to cut exposure to thermal coal. However, as senior executives offload assets, they continue to talk of a future for coal.

 

Analysts believe Rio and BHP have reduced their investments in thermal coal for financial reasons, but don’t want to deter buyers with an overt stance on the link between their divestment policy and coal’s future.

 

Sell-offs


Rio has sold US$2B of thermal coal mines since 2013, broken up its energy division and is reviewing the rump of its thermal coal portfolio in Hunter Valley. BHP jettisoned a large portion of its thermal coal assets in its South32 spin off, while its coal arm contributed 6% to group revenues last year.

 

Rio sold its 50% stake in the Clermont thermal coal mine in Queensland for US$1.3B in 2013, followed by its 40% stake in the Bengalla mine in New South Wales for US$606M last year. The group has exited the Mongolian coal miner
South Gobi Resources and the Riversdale project in Mozambique. Rio executives also believe that thermal coal prices are unlikely to recover before the early part of the next decade.

 

BHP has sold its thermal coal business in South Africa and in San Juan, New Mexico – although it has retained its thermal coal mines in Mount Arthur in New South Wales and Cerrejón in Colombia. In September, in light of the UN goal to limit global temperatures, BHP forecast thermal coal demand would fall 20% below its long-term average.

 

Cradle to grave

 

The Anglo-Australian mining giants’ repositioning has come as energy policy and public opinion across the West has moved against fossil fuels. In Britain, the cradle of the first industrial revolution, the demise of deep coal mining since the 1980s was sealed at the end of 2015 with the closure of the last remaining pit, once the largest in Europe, at Kellingley. Coal-fired power stations continue to shut down across the UK, with Scotland’s last, the 2.4GW Longannet plant, closing in March.


This year, Britain looks set to become the first large industrial nation without primary steel production capacity, with the coke-fuelled furnaces of its Port Talbot steelworks put up for sale by India’s Tata Group and facing closure.


But, on the other side of the Atlantic, the US coal mining sector as recently as 2008 was at a record high, producing 1.2 Bt of coal for domestic and world markets. Figures recently released by the US Energy Information Administration (EIA), show that this had fallen to 895 Mt in 2015 from 1 Bt in 2014.

 

US heartland


The mining heartland of Appalachia produced 267 Mt in the same year, although this was down by a third from the peak reached before the Great Recession. West Virginia produced more coal at the start of the decade than in the early 1950s, aided by mechanisation and a switch from deep to strip or contour mining, also known as “mountaintop removal”. But, in 2016, US coal finds itself at the tail end of its largest, and some would argue final, boom.


However, monthly US coal production in January was the lowest since 1983, according to the EIA, as the power sector continued its shift from coal to natural gas. Coal’s share of US electricity production has fallen to around a third in
2015. The largest decline in production is in Appalachia, with a further 8% slump expected for 2015.


The effect on miners in the world’s second largest coal producing nation after China has been severe. US consultancy firm Rhodium Group estimates that the combined market value of the US’s four largest mining companies has fallen from US$34B in 2011 to a mere US$150M in February, with two of the ‘big four’, Arch Coal and Alpha Natural Resources, filing for bankruptcy protection last year.

 

Energy mix


The profile of America’s own energy mix is rapidly changing, after decades in which coal was the dominant energy source. The EIA forecasts that 2016 will be the first year that natural gas-fired generation exceeds coal generation in the US on an annual basis, after surpassing coal generation on a monthly basis in April 2015.


Coal and natural gas each provided the same proportion of US electricity generation last year, but the EIA expects that natural gas will provide 33% and coal 32% in 2016, with non-hydro renewables (such as wind and solar) up to 8%.

 

Lower prices have made natural gas more attractive for power generation. Between 2000 and 2008, coal was significantly less expensive than natural gas and supplied half of US power generation. Increased shale gas production has changed the dynamic in the US market, and the share between coal and natural gas has reflected the price changes.


Gas surge


Low natural gas prices after the mild winter of 2011-12 led to a surge in its use over coal-fired generation, while higher natural gas prices in 2013 and 2014 triggered a rally for coal. Subsequently, falling gas prices brought a further drop in coal’s share.

 

The EIA believes that environmental regulations so far have had a secondary role in the decline in coal’s share of the US power generation market, but they will play a larger role in the future. (Some plant owners have shifted generation toward natural gas partly for environmental reasons).

 

Some US coal plants will face decisions to either retire units or reduce their rate of use to comply with carbon dioxide emission reduction targets under the Clean Power Plan, which has been stayed by the US Supreme Court in anticipation of litigation procedures but is scheduled to take effect in 2022.


Old power


The US is also stepping up the pace of its phase-out of older coal-fired power units, which represented more than 80% of the 18 GW of retired capacity in 2015. Environmental regulations have played a role in this decommissioning, with 30% of the coal capacity retired in April as new air pollution rules come into force. (Coal plants that received one-year extensions are expected to close down this year). The coal units that were retired in 2015 were mainly smaller and older units built between 1950 and 1970, with an average age of 54 years. US coal-fired power stations now have an average age of 38 years.


US coal exports are also in decline, falling for the third year in a row since the record volumes of 2012. The slowdown of China’s economy, a slump in world demand for coal, lower coal prices and higher coal output from coal exporting countries have contributed to the coal export slump.


Net exporter


However, the US remains a net exporter of coal. America’s bulk terminals and ports handled 74 Mt for foreign markets in 2015, and imported 11 Mt. In 2015, US coal exports were 23 Mt lower than in 2014 and more than 50 Mt less than 2012.

 

Lower mining costs, cheaper transport costs and the strength of the US dollar, which made for favourable exchange rates for weaker currencies, have helped producers in other major coalexporting countries, such as Australia, Indonesia, Co lombia, Russia, and South Africa.

 

Coal shipments to India increased by 2 Mt in 2015, however, and accounted for 9% of US exports, up from 5% in 2014. Coal exports to the rest of Asia fell. Europe has been a leading destination for coal exports in recent years, but exports were down by 28% or 14.6 Mt in 2015.


American seaboard


Coal exports from the US are concentrated on half a dozen port districts that handle around ninetenths of outward shipments. Norfolk (Virginia) and Baltimore (Maryland) serve the Atlantic coast, while New Orleans (Louisiana) and Mobile (Alabama) serve the Gulf of Mexico, and the Pacific west coast is served by San Francisco and Seattle.


In 2015, Norfolk, the largest coal port in the US that serves the central Appalachian mines, shipped 26.2 Mt of coal, or 35% of US export of the bulk commodity. Baltimore was the only major district (which exports more than 1 Mtpa of coal) to increase throughput, largely driven by the growth in trade with India.

 

US imports of coal remained flat at 11.3 Mt in 2015, of which 85% was steam coal for power generation. However, the sources and points of entry changed from 2014. Colombian coal imports were up 8%, offering a cheaper alternative to domestic coal for power generators along the Gulf of Mexico and southern Atlantic coasts. Indonesian coal imports decreased by 42%. In 2015, Tampa, Florida, overtook Mobile, Alabama, as the top coal import facility.


Showing some metal

 

Metallurgical coal, for steelmaking, was primarily imported from Canada, driving up volumes through Portland, Maine. The closure of coal-fired electricity generators in New England led to a 41%, or 0.5 Mt, decrease in imports into Boston.

 

America’s rail infrastructure has continued to be the main means to bring coal from bulk terminals. Most of this coal was destined for US power generators that consumed 740 Mt of coal in 2015, accounting for nine-tenths of the nation’s coal consumption.


Although coal consumption in the electric power sector is down by 18% from the peak in 2008, the share of coal shipments made either exclusively or in part by rail has remained near 70%. The share of coal shipments made by river barge increased from 7% to 12% over the same period, in line with the growth of coal produced in the Illinois Basin and shipments along the Ohio River.


Asian tremors


US coal producers and investors are still looking to bulk terminal developments on the West Coast to increase exports, however. The Gateway Pacific Terminal at Cherry Point near Ferndale, Washington would offer capacity of 48 Mtpa
of Montana coal for Asian export markets, although it has faced stiff environmental opposition.


The proposed Millennium Bulk terminal, with the potential to handle 44 Mtpa of coal in Longview, Washington, is also in the balance, following its developer Arch’s filing for bankruptcy last year. Lighthouse Resources has plans for a facility along the Columbia River at the Port of Morrow to handle 8.8 Mtpa of coal from the Powder River Basin of Montana and Wyoming, but has faced objections over its impact on fisheries.

 

But American coal, along with the wider global sector, is in transition (and some would argue free fall), irrespective of efforts to reach out to Asia. Domestic factors such as low-cost natural gas, environmental regulations and adverse
public opinion have weighed against the industry.

 

But, amid the decline in domestic US consumption of thermal coal, China’s economic slowdown has also hit higher value metallurgical coal used for steel production. Met coal prices surpassed US$200/t in 2011, 250% more than relatively expensive central Appalachian steam coal (prices had collapsed to US$86/t at the end of 2015).


Rhodium Group argues that combined changes in met coal production and price have resulted in the majority (57%) of the decline in coal producer revenue between 2011 and 2015. China’s rebalancing continues to reverberate across the Pacific.

 

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