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A King Dethroned
The Sorry State of Coal

The biggest private coal company on the planet filed for bankruptcy today, marking the biggest sign yet of the struggling health of the global coal industry. The FT reports:

The world’s largest private sector coal producer by output sought protection under Chapter 11 of the US bankruptcy code in a Missouri court, weeks after it delayed two bond interest payments and warned of its potential inability to continue as a going concern. […]

Peabody blamed “unprecedented” factors affecting the global coal industry, including a sharp drop in the price of metallurgical coal — used in steelmaking — and weakness in the Chinese economy, as well as problems in its domestic market.

The US coal sector expanded through acquisitions at the start of the decade but has been hit by competition from cheap gas and tightening environmental regulations. Of the four largest US coal producers, three — Alpha Natural Resources and Arch Coal as well as Peabody — have filed for bankruptcy. The trio accounted for about 41 per cent of US coal output in 2014.

The two biggest culprits for the dethroning of Old King Coal are slowing Chinese demand and the American shale boom. In China, concerns over the massive amounts of deadly smog generated by coal-fired power plants and a desire to decrease reliance on foreign sources of energy have led to a concerted effort to diversify away from the sooty rock. That strategy has coincided with the bursting of the Chinese bubble which has necessarily depressed demand coal further, and put China on the path towards significantly ramping up its coal exports this year. When you take into account the fact that China consumes roughly half of the world’s coal, all of this becomes a very big deal for producers everywhere.

And then there’s fracking. The shale boom unleashed a veritable flood of new supplies of natural gas here in the United States, and have pushed spot prices for the hydrocarbon down to preposterously low levels. Natural gas can be burned to generate electricity, and suddenly coal-fired plants—the dirtiest but often cheapest options—have found themselves out-competed on price. The EIA expects natural gas to displace coal as the largest source of U.S. power this year, and that’s a direct result of the shale revolution. When you consider the fact that natural gas emits far fewer local pollutants and half the greenhouse gases, this is nothing less than a green triumph.

That will come as cold comfort for the coal industry, though. If there’s any silver lining, perhaps it’s this: demand for the cheap and dirty rock is still robust across the Atlantic in “green” Europe.

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  • Frank Natoli

    The two biggest culprits for the dethroning of Old King Coal are slowing Chinese demand and the American shale boom.
    No mention of a President who promised to bankrupt coal, who then stacked his EPA to do exactly that. What’s wrong with this picture?

    • rheddles

      Natural market forces were not allowed to work their way. Instead those who cherish their Bible and their defense are sent to the wolves without any. On to windmills that kill birds in numbers unimaginable.

  • Blackbeard

    Dethroning coal and switching to natural gas actually makes some sense. Natural gas is cleaner and much safer to extract. It’s cheaper too if you factor in the cost of getting coal emissions down to natural gas levels. But the Greens are, of course, not stopping there. Natural gas is the next target and Hillary and Bernie have already promised to shut down fracking. Think that’s a bluff? Obama promised to bankrupt the coal industry and he kept his promise.

    • Andrew Allison

      Not only that, but if-and-when (in the distant future) we run out of oil and natural gas, the US will have several centuries worth of coal in the ground.

    • SLEcoman

      Typically there are about 30 fatalities/year in the US coal mining industry. In the first half of 2014 alone, there were 43 fatalities associated with oil & natural gas production.

  • Andrew Allison

    “pushed spot prices for the hydrocarbon down to preposterously low levels” is a preposterously stupid comment. Think about it.

    • SLEcoman

      I know of no US natural gas producer that is willing to sign even a 3 year, much less long-term, natural gas supply contract at current prices (~$2.00/MMBtu ~ $12/boe).

      • Andrew Allison

        There’s nothing preposterous about prices set by the market. Unprecedented perhaps, punishing maybe, but by no stretch of the imagination preposterous.

  • SLEcoman

    At least since 2000, US steam (as opposed to metallurgical) coal exports have been a minuscule portion of US coal demand, and China has been a very small fraction of US coal exports. The reality is the five (yes five, not one) US coal market prices move somewhat independently of each other and certainly independent of international seaborne coal prices.

    The three biggest factors leading to coal industry bankruptcies:

    1. Excessive expansion financed by debt when international metallurgical (coking) coal prices were extremely high.
    2. Competition from low priced natural gas driving down demand for coal-fired power generation
    3. Environmental regulations, especially the Mercury Air Toxics Standard (MATS), which led many power generators to shutdown older coal-fired electric generating units (EGUs) rather than invest in additional pollution control equipment.

    Today, the Henry Hub (traditional benchmark) US natural gas price is $1.97/MMBtu, which is just under $12/boe (barrel oil equivalent). No one in the E&P (exploration & production) side of the business believes that current levels of natural gas production can be sustained at anywhere near $12/boe. I would remind people that, in April 2012 when the Henry Hub price averaged $1./99 MMBtu and natural gas fired power generation market share equaled coal-fired power generation, there were many media reports and political pundits predicting that coal fired power generation could no longer compete. These comments were made even though the CEO of Exxon Mobil was saying that natural gas production was not sustainable at prices anywhere near $2.00/MMBtu. Fast forward to February 2014, and the HH natural gas price averaged $6.00/MMBtu ($34.80/boe); US power market share: coal = 44%, natural gas = 23%.

    In case anybody is foolish enough to think that MATS actually will provide a public health benefit, I suggest you read the following
    “Mercurial Madness:Toxic Analysis and Double Standards”, Journal of American Physicians and Surgeons Volume 20 Number 2 Summer 2015. Or one could just use common sense. When the Mount St. Helen’s volcano erupted, it spewed many times more mercury into the air than any coal-fired power plant, but we haven’t seen reports indicating that these mercury emissions produced public health problems.

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