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 Indiana, Virginia, 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 Carolina, West Virginia, Wyoming, Virginia, Texas, Ohio, 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:
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(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:
- Ambre Energy IPO Delayed Beyond June, Possibly Longer
- Standard & Poor’s cuts Arch Coal rating
- Bank of America downgraded shares of Peabody Energy
- [Alpha Natural Resources] No Longer an S&P 500
- Patriot Coal Files for Bankruptcy; Bondholders May Not Recover Much in Restructuring
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.