Coal isn’t going away soon! China’s clean fuel focus tests U.S. coal exports lifeline


A child wearing a mask plays in the heavy smog in Qingdao in east China’s Shandong province on Jan. 24, 2013. Experts say that if China wants to avoid the kind of smog that choked the country earlier, it must overhaul an economy fuelled by heavily polluting coal and car use.

Photographer: AFP via Getty Images

The mud-colored air that blankets Chinese cities these days is bad for the people who live there. It may prove unhealthy for U.S. coal producers, too.

Intense opposition on the U.S. West Coast, over climate change, rail congestion and damage to Native American fisheries, already is blocking new export terminals designed to ship coal across the Pacific Ocean. Now, China — which consumes almost as much coal as the rest of the world combined — is accelerating a planned switch to cleaner fuels, including a possible cap on carbon emissions and limits on new coal-fired plants.

Even if such changes don’t occur as fast as environmentalists might hope, Chinese President Xi Jinping plans to scrap the economic strategy that spawned coal-eating steel plants in every province. Mounting anti-coal sentiment in China and the U.S. imperils the ambitions of companies like Peabody Energy Corp. (BTU) and Arch Coal Inc. (ACI) in the world’s fastest-growing region.

“The game for U.S. coal producers has to be Asia,” says Richard Morse, managing director at SuperCritical Capital LLC, an energy research firm. “That’s where all the action is.”

For U.S. coal producers, getting there is the problem. The industry’s most attractive and plentiful deposits lie in Wyoming’s Powder River Basin, where excavators claw the earth to harvest inexpensive, low-sulfur coal. Today, some of that coal is shipped via rail roughly 1,700 miles to a Canadian port where it’s loaded onto vessels bound for China, South Korea and Japan.


Laborers working at a coal mining facility in Huaibei, in northern China’s Anhui

Three Survivors

Industry representatives several years ago began eyeing shorter routes to those countries and India, via Oregon and Washington State. Campaigns by anti-coal activists in those states whittled six proposed terminals to three survivors. None are close to starting operations.

The latest setback came May 30 when Oregon state regulators put off until August a decision on the proposed Morrow Pacific terminal, the eighth in a series of delays that have frustrated investors and executives. Three days later, the Obama administration proposed regulations to cut carbon emissions, underscoring the imperative for coal producers to develop foreign markets.

“We’re winning,” says Cesia Kearns of the Sierra Club’s “Beyond Coal” campaign.

Coal Dependence

Across the Pacific, where Big Coal sees its best long-term prospects, similar environmental concerns are materializing. In January, China, the world’s biggest coal consumer, brought forward to this year a previously announced goal of reducing its dependence upon coal to less than 65 percent of its energy usage by 2017. Further limits are under discussion.

“China’s overall role as net importer of coal is likely to decline in the years ahead,” said Trevor Houser, a former State Department adviser to negotiations with China on energy issues.

Still, coal producers’ enthusiasm for Asia remains undimmed. Arch Coal initially is focused on expanding sales to countries such as South Korea and expects “eventually” to see gains in China, according to Deck Slone, senior vice president of strategy and public policy.

Even with a slowing economy and greater reliance upon renewable energy, China will be a heavy coal user for decades.

The sheer size of the economy — now the world’s second largest — means that slower growth than this year’s 7.5 percent target won’t prevent electricity demand from increasing. As total power generation more than doubles by 2030, China will be adding capacity equal to the entire U.K. power grid each year with coal firing 58 percent of the system, according to a 2013 Bloomberg New Energy Finance study.

‘Staggering’ Consumption

“Look at any projections of the amount of coal that China is going to use in the next 20, 30 years, it’s quite staggering,” said Colin Marshall, chief executive officer of Cloud Peak Energy Inc. (CLD), a Gillette, Wyoming-based company that operates three surface mines in the Powder River Basin.

And even if the West Coast terminals don’t materialize, Asia-bound exports could continue via Canada or through the Gulf of Mexico to an expanded Panama Canal, though less profitably, industry executives say.

As environmental regulations and competition from natural gas damp prospects in the U.S., exports are increasingly important for mining companies. Shipments to overseas customers peaked at almost 126 million short tons in 2012, about twice the 2009 level, before sliding to 118 million last year amid a global supply glut, according to the U.S. Energy Information Administration.

Asia Key

“The demand for coal globally is going to continue to increase,” said Hal Quinn, president of the National Mining Association. “Asia is a bigger and bigger part of that story.”

Exports will remain above 100 million tons this year and next, according to the agency’s latest short-term forecast.

The three terminals that are still alive — Morrow Pacific in Boardman, Oregon; Gateway Pacific in Cherry Point, Washington; and Millennium Bulk in Longview, Washington — could almost double U.S. exports.

Ambre Energy’s proposed Morrow Pacific terminal would provide for 8.8 million tons of coal to be shipped from mines in Wyoming and Montana to the Port of Morrow in Boardman. The coal would be stored in covered shelters then be taken by barge down the Columbia River to Port Westward, where crews would load it onto tankers for the trip across the Pacific.

Oregon Governor John Kitzhaber, a Democrat, came out against the project in April, saying, “The future for Oregon and the West Coast does not lie in 19th century energy sources.”

Transportation Snags

Though Europe absorbs about half of U.S. exports, Asia — with roughly one-quarter — has been a faster-growing market for U.S. producers.

Since 2009, when China first became a net importer of coal, only the U.K.’s demand has increased faster. Though China boasts the world’s third-largest recoverable coal reserves, transportation bottlenecks make it costly to get coal from mines deep in the interior to industrial centers along the southeastern coast. That makes imports attractive — if the price is right.

From the textile mills of 19th century England to the carmakers of Detroit, industrialists have looked to China to lift their fortunes. The country last year imported about 270 million tons of coal, according to China customs data.

Under an urbanization drive announced in March, China plans to move 100 million more rural residents to cities by 2020. Five new national transport corridors will knit together the country with new rail and road links, supporting demand for coal-fueled steel and electricity production.

New Plants

China used 3.6 billion metric tons of coal in 2012 and is projected to need 4.8 billion in 2020, Liang Jiakun, vice head of the China National Coal Association, said last year.

Though China’s coal appetite is slated to rise at less than half its previous annual rate, coal producers see plenty of potential business.

Arch Coal last year opened an office in Beijing. The St. Louis-based company owns 38 percent of the Millennium Bulk project and is spending more than $600 million on the venture.

Peabody Energy, the world’s largest private-sector coal company, got more than 10 percent of its revenue from China last year compared with less than 3 percent two years earlier. Rising rail and labor costs in China are encouraging future import growth, Gregory Boyce, CEO of the St. Louis-based company, told investors on April 24.

Prices Slump

Yet since plans for the West Coast terminals were first drawn up, coal prices have slumped and China has battled chronic air pollution that one Chinese government adviser earlier this year labeled “unbearable.” Last month, the State Administration of Work Safety announced plans to shutter 2,000 small mines before the end of 2015 to reduce pollution.

In China’s Qinhaungdo trading hub, a metric ton of coal sells for $100, more than a third below its 2011 peak. That earlier era of high prices resulted in new supplies flooding the market, depressing prices and making it harder for U.S. suppliers to compete against closer Indonesian or Australian mines.

“You have seen some change in investor confidence in those projects because of the recent fall in Asian coal prices,” said Houser, a partner at New York-based Rhodium Group, where he leads the energy and natural resources practice.

Shares Drop

Arch Coal’s shares have lost more than 26 percent of their value over the past year even as the Standard & Poor’s 500 Index has risen 19 percent, as of yesterday. Peabody’s shares have fallen almost 12 percent.

Houser says coal demand could fall especially sharply in China’s coastal regions, where anti-pollution efforts will be most intense. If demand moves to the west, then imports will be less competitive with domestic producers, he said. China already is shifting new power generation from eastern cities to western provinces.

“The bigger risk for a company like Peabody or Arch is that slower Chinese coal-demand growth and a relocation of Chinese coal demand to the west of the country is bad news for pricing in Asia,” he said. “So even if you could sell the quantity, you’re not going to get nearly the same price as in the past.”

Source: Bloomberg

About Ritesh Pothan

Ritesh Pothan, is an accomplished speaker and visionary in the Solar Energy space in India. Ritesh is from an Engineering Background with a Master’s Degree in Technology and had spent more than a decade as the Infrastructure Head for a public limited company with the last 9 years dedicated to Solar and Renewable Energy. He also runs the 2 largest India focused renewable energy groups on LinkedIn - Solar - India and Renewables - India
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