More Evidence of Morrow Pacific’s Financial Weakness

Ambre CEO admits that coal exports couldn't earn a profit at today's prices.
This post is 7 in the series: Coal Exports: Caveat Investor

A few weeks back, we released a report on the shaky economic fundamentals of Ambre Energy’s Morrow Pacific coal export project. In a nutshell, documents released by Ambre Energy, the project’s developer, make the project look like a dud. By handling coal at two separate port terminals, Morrow Pacific incurs higher costs for transportation, operations, and capital than its likely competitors. In fact, the costs are so high that it’s not clear that Ambre could make any profit whatsoever selling coal into Asian markets.

But apparently we’re not the only ones saying that Morrow Pacific’s finances are dicey. The project’s chief executive is saying the exact same thing. A recent story in Platts Coal Trader, a subscription-only industry journal, quoted Ambre Energy’s North American CEO admitting that the project can’t make money unless international coal prices rise substantially:

Clark Moseley, the president and CEO of Ambre Energy North America, said…that the company is pushing ahead with the project, though he conceded current prices might prevent the terminal from making a profit.

“At today’s thermal prices, we could break even at best,” Moseley said.

Asked by a panelist why Ambre would go with the venture if it’s not profitable, Moseley said the coal market will strengthen based on projected international demand. [Emphasis added.]

There you have it, straight from the horse’s mouth. Ambre Energy is betting the farm—and its investors’ capital—on a substantial, long-term rise in international coal prices. I’d be the first to admit that could happen. But the historic volatility of coal prices—including a price decline of more than 30 percent over the past year due to massive oversupply in the global coal markets—makes Morrow Pacific look less and less like a sure thing, and more and more like a desperate longshot.

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Comments

  1. Mark says:

    I would be very interested to hear more about the reasons behind the decline in coal prices. Not long ago some were suggesting that high coal prices were the indication of the onset of peak coal (I’m thinking specifically of Dr. Tad Patzek at UT-Austin). Has production increased significantly, or is this a product of a decline in consumption by the US and China?

    Apologies if this has already been addressed elsewhere here (pointers welcome if so).

    • Clark Williams-Derry says:

      Great question. My sense is that there’s a combination of factors. The slowdown of demand growth in China is one. (US coal consumption is actually up in 2013 v. 2012, but that’s not a significant factor since there’s still a ton of unused US mining capacity.)

      The bigger factor in my opinion is a somewhat boring, plain-vanilla explanation: when prices rise, people adjust. For the most recent rise in prices, from about 2009 through 2011, the biggest economic adjustments were on the supply side. We saw lots of new mining projects launched in Australia and Indonesia, all premised on sustained high coal prices.

      That’s the big reason why Australia’s coal industry has been in freefall over the last few months. They glutted the market, and prices fell.

      This is a pretty standard problem with commodity economies. When prices rise, *everybody* in the market sees the same price signal, and *everyone* responds in a predictable way: by simultaneously trimming demand and increasing supply. companies who invest in new supply get screwed when, in relatively short order, the market becomes glutted from oversupply and falling demand. It’s a depressingly predictable cycle — depressing mostly because no matter how many times it happens, it always seems to catch people by surprise.

      The big problem for a company like Ambre is that in the long run, the global coal market typically reaches an equilibrium where marginal coals — like the PRB — are just barely breaking even. The profits are tiny; middlemen (such as rail companies) can squeeze out profits; and the visions of handsome profits from sustained high prices rarely materialize.

  2. Don Steinke says:

    Clark,
    Thanks for all the investigations you and Sightline conduct. (yes I’ve donated).
    Here’s a minor correction. According to the Ambre website, Moseley is the chief executive for the Morrow-Pacific Project, not CEO of Amber North America. http://www.ambreenergy.com/executive-management.

  3. Don Steinke says:

    oops, Ambre not Amber.

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