Why Big Coal’s Collapse Matters To The Northwest

The financial clock is ticking for coal companies.
This post is 1 in the series: Coal Exports: Caveat Investor

A few weeks ago I wrote about the astonishing and unprecedented nosedive in domestic demand for coal. That collapse has been good news for the climate and human health. But it’s been terrible, horrible, no good, very bad news for Big Coal.

Just how terrible?

Simply put, the coal industry is in freefall. Mining companies are shuttering operations left and right. A quick Google scan turns up recent coal mine closures in IndianaVirginia, West Virginia and Pennsylvania, and reports of layoffs and mine closures throughout Appalachia.  At the same time, power companies are shuttering a raft of coal-fired power plants, including facilities in South CarolinaWest VirginiaWyomingVirginiaTexasOhio, Pennsylvania, and Maryland, as well 10 aging plants in the Midwest and East. I’m sure that a few more minutes on Google would turn up examples that I missed.

And the financial markets are certainly noticing the same trends we are. Stock prices for major domestic coal companies went into a nose dive just over a year ago, and have dipped even lower this year. See, for example, this chart from Yahoo Finance:

(Click on the image for a larger version.) The green line at the top represents the S&P 500—a rough proxy for the stock market as a whole, which has generally been doing OK. The cluster of lines at the bottom, as well as the shaded blue area, represent the share prices of a handful of major coal companies traded on US stock exchanges: James River Coal Company, Alpha Natural Resources, Arch Coal, Walter Energy, and Peabody Energy. James River Coal’s share prices peaked at nearly $60 in 2008; on today’s market, it’s hovering around $3.

There’s simply no silver lining here for Big Coal. A scan of headlines over the past few months tells a tale of an industry ill-equipped to compete in today’s marketplace:

Big Coal’s bond ratings are taking a hit as well. Arch Coal’s credit rating took a hit earlier in the year. Alpha’s done no better:

Alpha Natural Resources’ credit worthiness plunged as Moody’s affirmed its assigned Baa3 rating, which indicates a negative outlook in terms of meeting financial commitments by the company in the long run. The company was unsuccessful in its cost management efforts as during the second quarter it incurred $2.2 billion of expenses due to restructuring and impairment purposes.

It’s hard to overstate what a dramatic swing this has been for the coal industry. As recently as 2007, more than 150 new coal-fired power plants were on the drawing boards in the US. With coal consumption looking like it was set to soar, the industry took on risky, debt-fueled expansion plans.

Yet now the action on coal is all in retiring old coal power plants, not building new ones. And debt-burdened coal companies are faced with falling revenues, higher costs for borrowing money, and rising risks of defaulting on bond payments.

Why does any of this matter here in the Northwest?  The Northwest states no longer mine any coal. Neither do we burn a lot. And the two largest coal-fired plants in the region—the Centralia plant in Washington and the Boardman plant in Oregon—have already committed to phasing out coal starting in 2020. For Big Coal, the Northwest is simply part of their long-term woes.

Well, the biggest reason to pay attention to Big Coal’s declining fortunes is that it helps explain the industry’s mad dash to export coal to China through Northwest ports. The industry—quite correctly—perceives recent trends as an existential threat. They’re in full freak-out mode. If they can’t turn things around soon, some of these coal mining companies will likely sink; like Patriot Coal, which has already filed for bankruptcy, they’ll simply be unable to make their debt payments.

So that puts Northwest coal export proposals into a new light. Export-hungry coal companies aren’t exploring an exciting and lucrative new business opportunity. They’re clutching at straws. Exporting dirty, domestically unpopular products to China and India represents a last, desperate gasp for an industry that appears to be past its prime, and has nowhere else to turn.

Despite coal companies’ expressions of confidence about the financial viability of coal exports, they’re an incredibly risky venture with a terrible history of failure. US coal companies will be competing with well-established coal exporting rivals, such as Indonesia and Australia, that enjoy lower shipping costs to Chinese ports. And even though China’s coal imports boomed over the last few years, China’s coal industry now faces just as much turmoil as ours does: China’s coal consumption has fallen; importers are stockpiling unwanted coal in harbors; coal buyers have turned away some new shipments for lack of both demand and storage space. And to make matters even riskier, the Chinese are also looking to import America’s natural gas “fracking” techniques—which could send China’s demand for coal plummeting in short order.

And that points to a second reason to pay attention to national coal trends: Big Coal is in a race against time. Coal industry executives can’t like what they see in their crystal balls: falling or stagnating sales; declining revenues; retrenchments that may cost money in the short term; massive debts; poor bond ratings leading to high borrowing costs; plus delays and other hitches in getting Northwest coal export projects underway. If they can’t fill the pipelines to Asia soon, their borrowing costs could rise still further, and they may simply be in no position to raise the substantial capital they’ll need to pay for rail, shipping, and port upgrades.

I’ve got no clue how fast that clock is ticking for coal companies. I simply don’t know how much time will have to elapse before the capital markets decide that coal export projects are just too risky to be financially tenable. But folks considering investments in the coal industry have got to be mighty spooked by the substantial public and political opposition to Northwest coal exports, since it just compounds the already substantial risks these projects face.

And knowing that they’re not only changing minds, but moving markets, must be incredibly motivating to the opponents of coal exports.

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Comments

  1. Barry Saxifrage says:

    Wow. Great research and article. Thanks.

    I read on deSmog the other day that USA rail lines are starting to fill up with Bakken and other oil shipments. Seems they are already pushing some limits for capacity. Will be interesting to watch if this ends up limiting how much coal could even be theoretically shipped via rail for export. I’m guessing the high-value oil wins out over low-value coal in any tug-of-war for rail space.

    Another benefit of coal collapse is it might mean less dollars available to pump into the climate denial machine. Especially since climate regs aren’t what is killing the industry.

    • klem says:

      “I’ve got no clue how fast that clock is ticking for coal companies.”

      Surely you don’t believe that coal will vanish as a fuel supply? All you have demonstrated above is that the world recession has hit coal corporate share prices only. Coal production itself has remained roughly steady since 2005.

      The reduction of coal and the replacement by high value oil generates revenue for more oil exploration plus it provides more money for the climate denial machine. The Kochs are oil people, not coal people, coal is a competitive product. The denial machine will be even better funded.

      • Clark Williams-Derry says:

        No, i don’t think coal will vanish. I wouldn’t mind if a coal company or two vanished — which would raise the capital cost for future coal mining investments!!! But yes, the coal will still be there, hanging around as an existential threat to the planet.

        Coal isn’t being replaced by oil, though. At this point, there’s virtually no substitution between coal & oil (or between natural gas and oil, for that matter). That wasn’t always true, but it’s been true for the last few years.

  2. Barry Saxifrage says:

    FYI: Clicking on stock price chart leads to broken link warning for me

    • Clark Williams-Derry says:

      Thanks for the catch! It should be fixed now, Barry!

  3. Jon Stahl says:

    “Export-hungry coal companies aren’t exploring an exciting and lucrative new business opportunity. They’re clutching at straws. Exporting dirty, domestically unpopular products to China and India represents a last, desperate gasp for an industry that appears to be past its prime, and has nowhere else to turn.”

    Great reframe, Clark!

  4. Chris Troth says:

    Excellent post, Clark.
    In addition to the risks around coal and coal shipments, I think it also speaks quite clearly to the need and opportunity for investment in renewables.
    Hydrocarbons have a quite volatile price history; boom, followed by bust. That may be great if you manage to always be on the right side of the price action, but it is nothing to build an energy policy around. Just today, a projection of lower supply and higher prices for nat gas lifted the prices of the nat gas producers, and the coal names, in some cases by more than 10%, from their current low levels. There is some headline risk for you. For better or worse the shale gas and shale oil “boom” is very likely to be of quite short duration (and good luck to the Chinese in trying to replicate what we have done – they are much more constrained by lack of water than we are, especially in the north and west of China).
    So we can either keep hopping between the frying pan of nat gas and the fire of coal for the majority of our power generation, in the vain hope of minimizing the burn of volatile pricing and climate damage, or we can escape that dynamic with massive investments in solar, wind and geothermal. In terms of long term investment, financially, and for us as a species, that is clearly the way to go.

  5. TOM CIVILETTI says:

    Great work – good news. Coal, all of it, needs to remain in the ground until that magical day that it can be used without CO2 emission.

  6. Alan says:

    Volatile’s the word. NGas spot prices just reached $3.50 which is the high end for coal displacement. It’s not going to hold, isn’t warranted, but mid-winter or next heating season new demand may soak up enough of the gas surplus to keep gas above $3/ccf on the spot market. That would be enough to slow coal displacement; $3.50 for a long time might stop it.

    So handy to live in the PacNW where we needn’t fret hardly at all if Boardman or Colstrip close, outside of transmission support and balancing for all the wind coming on line. Not so if you’re in Ohio or Pennsylvania or other individual states, some with more people than the entire NW. Without cheap NGas to offset coal decommissioning, there’s no short-term fix.

    Thus the paradox – if lots of coal plants close and their power is replaced by NGas, gas prices will rise, quashing additional closures. How to get around this? We need a carbon tax during the next presidential administration. Gas can compete with coal if all the costs are included in each.

    BTW there’s not enough oil to offset coal trains. Coal trains are the baseload of the entire rail system, right up there with corn and soybeans.

    • Clark Williams-Derry says:

      Yes, yes, yes, yes! Dead on, Alan.

  7. Angus Duncan says:

    Clark: Your survey is dead on, and this is generally good news for the region, the country and the climate. There are a few flies in the ointment, however. First, what’s killing coal is natural gas, not wind/solar. If we buy into a gas combustion turbine future in exchange for shutting down coal plants, GHG emissions only stutter, then grow more slowly. We’re still not on the downward GHG trajectory that’s needed, and we’ve made getting there harder with a fleet of new gas plants that won’t close for another 30 year, while we’re turning off the balancing subsidies, national and state, for renewables. Second, the coal plants (with a few “Boardman” class exceptions) that are closing are often Truman/Eisenhower era units: old, inefficient, exceptionally dirty in criteria pollutants and not worth the cost (to their utility owners) to retrofit to Clean Air Act standards. We need EPA (post-election and in a second Obama term) to deploy GHG regulation for EXISTING power plants, not just new ones that were never going to be built anyway. Third, closing Boardman (PGE) and the Centralia units (merchant plants) leaves the majority of the PNW coal fleet in place — in WY/MT/UT — and delivering to loads in Puget, PacifiCorp and PGE territory. Much harder to get at and terminate.

    Sorry to be the cold drink of water at a good, and well-earned, party.

    Angus

    • Clark Williams-Derry says:

      You’re exactly right here, Angus. This is a mini-celebration — the big celebration comes when we get a comprehensive climate policy that puts downward pressure on GHG emissions from all sources, not just old coal plants.

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