Although it remains the country’s largest private sector provider of jobs, the U.S. coal industry is hurting. Domestic utilities are turning to lower-priced natural gas. Environmental opponents are working hard to keep the mineral in the ground. Coal companies have attempted to compensate by reining in costs and ramping up exports. Will it work?
Cheaper and cleaner natural gas has cut coal’s share of U.S. electricity generation from 50% to less than 40% over the past decade. Outside pressures have mounted at the same time, making hopes of a domestic recovery a pipe dream.
In response, top tier coal producers such as Peabody Energy Corporation (NYSE:BTU), Alpha Natural Resources, Inc. (NYSE:ANR) and Arch Coal Inc (NYSE:ACI) trimmed capital expenses and sliced production — which dropped 7% year over year in 2012 to the lowest level in two decades.
With U.S. consumption expected to rise only modestly over the next few years, exports are the only growth engine available to the beleaguered industry.
Coal companies work to increase their opportunities
Peabody Energy Corporation (NYSE:BTU), the top U.S. producer by revenue, is already the most global of its peers with an operation in Australia that allows it to easily ship coal to Asian markets. It has also been securing additional shipping capacity at home, such as the deal it signed last year with Kinder Morgan Energy Partners LP (NYSE:KMP) to boost its presence at their Houston terminal. All of this paid off with record export volumes in 2012.
Number-three producer Alpha Natural Resources, Inc. (NYSE:ANR) has become the largest U.S. exporter of metallurgical coal, a primary component in steel making, by expanding access to shipping points. Last year it exported 20% of its production, representing 40% of total revenue.
Number-four producer Arch Coal Inc (NYSE:ACI) also has deals with several terminal operators, including Kinder Morgan Energy Partners LP (NYSE:KMP), which is spending $400 million to expand the facilities it operates along the Gulf of Mexico and the East Coast. Additionally, Arch Coal Inc (NYSE:ACI) opened an office in Beijing, and last year its exports rose 30% over 2011.
Another producer not to be dismissed is CONSOL Energy Inc. (NYSE:CNX). While smaller than those mentioned above, it has set itself apart with notable operations in the natural gas space, increasing its appeal to anyone looking to hedge their bets. While CONSOL Energy Inc. (NYSE:CNX) has essentially abandoned any efforts to grow coal production, it is increasing capacity at its 100%-owned storage and shipping terminal in Baltimore. In 2012, exports from this facility rose 50% year over year and the expansion could increase that another 30%.
Exports strong, but facing headwinds going forward
The idea of expanding exports to the world’s biggest customers — currently China, the Netherlands (a large transshipment point), the U.K., South Korea and Brazil — sounds good. And the U.S. Energy Information Administration (EIA) reports shipments of 6.3 million short tons of steam coal and 7.4 million short tons of metallurgical coal in March set a monthly record. Increased Asian demand contributed to the standout month.
But with China’s economy slowing, exports of metallurgical coal are taking a hit. According to the U.S. Census Bureau, they dropped 25% in May from April as demand for steel in China fell. And while some observers expect steel manufacturing to increase in the second half of 2013, no evidence has been seen as the first half draws to a close.
Future export projections offer another reason for caution. The EIA expects 2013 to be the third straight year that more than 100 million short tons of U.S. coal will be shipped overseas. But it sees a drop to 110 million from last year’s 126 — and a further decline to 107 in 2014. Continuing economic weakness in Europe, slowing Asian demand, increasing supply in other coal-exporting nations and falling international coal prices are the reasons for this.