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Arch Coal’s Abandonment of Montana Project Means the Dream of a West Coast Coal Export Boom Is Dead


March 11, 2016
Tom Sanzillo

Arch Coal’s decision to abandon its initiative to build the proposed Otter Creek mine in southeast Montana tells—and reminds—us of several things about the U.S. coal industry today.

  • First, that the market sees no need for a new mine of the size and type Arch originally thought workable. Price signals from both international and domestic markets are weak, and there is nothing to suggest they will improve significantly in the foreseeable future.
  • Second, the order of the day across the industry is shrinkage—mine closings and consolidations—not expansion, as oversupplied markets seek some rational balance between supply and demand.
  • Third, dreams of a U.S. coal-export boom off the West Coast have failed (along with Arch’s sponsorship of related rail and port projects) a reality that companies still looking to expand port capacity would do well to heed.
  • Fourth, the U.S. coal industry is now and will be for the foreseeable future a domestic industry that sells coal to U.S. power plants, which makes reorganization of the domestic market its top priority.
  • Fifth, the industry’s corporate business model is broken. Shareholder demand for value and dividends is incessant and insidious, and corporate coal executives have taken the bait, having committed fatally over the past several years to overleveraging and high-risk propositions. Structural changes in the marketplace leave companies like Arch, as a result, on the short end of the competition stick, putting the industry out of step and unable or perhaps just unwilling to diversify and innovate.

Arch Coal today finds itself on a long and growing list of U.S. coal producers that have lost money in new mine ventures and particularly in new mine ventures tied to projections of large-scale demand from Asia.

Coal producers that continue down the path Arch is now quitting are pursuing a losing proposition and will continue to burn through shareholder dollars while they look for publically financed bailouts.

Tom Sanzillo is IEEFA’s director of finance.

Related posts:

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Chorus of Distress Signals Suggests a Bigger Storm in U.S. Coal

If Peabody Is to Recover, It Must Close More Mines

Coal Is a Risky Investment for Oakland

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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