February 23, 2016 Read More →

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

Datelines Montana, Wyoming, Utah, Colorado …

As distress signals flash with more and more urgency in bits and bursts from across the U.S. coal map, they say much more collectively than any lone dateline can muster.

Clearly, the industry is in trouble.

Sometimes the bigger picture goes unsaid, though—as when FirstEnergy, the Ohio-based utility company, is in the news for declaring an impairment on its Signal Peak coal mine holding in Montana, a joint venture with the Gunvor Group. Or when Bowie Resources, a coal-mining company with key holdings in Utah, acknowledges Trafigura wants out.

The two stories taken together reveal a larger point: If neither Gunvor nor Trafigura, both of which are global energy market players, can find export-shipment deals through West Coast ports, then such deals are in very short supply indeed.

Meanwhile, out in Wyoming, Cloud Peak Energy is confirming what most market watchers already knew: That it will not export any coal this year. As noted here previously, the company’s relatively robust export operations accounted for a crucial 18 percent of revenue in years past. Now Cloud Peak faces the problem of having no exports at all while its sales base to U.S. utilities shrinks.

Concurrently over in Colorado, the state reports that mines there produced the lowest tonnage in 23 years in 2015.

And David Crane, the former CEO of NRG Energy (which is run out of New Jersey and Texas), is weighing in on the future of coal by dismissing the standard industry complaint that over-regulation is its problem. Crane to his ample credit quite bluntly says the industry is in decline because it is losing market share to natural gas. He asserts that in the future—also to his credit—the only coal plants in the country that can continue to operate are those propped up by public service commissions willing to pass higher electricity prices onto consumers. Crane doesn’t stop there, getting into extra-credit territory by calling out executives across the utility sector for horrific corporate-citizen behavior for failing to address employment and community damage from plant closings across the country.

U.S. coal has a future. The question is what that future might be. Those who are trying to sell or buy coal reserves to generate cash or offload liabilities are working off a dead business model.

Can the industry respond to the current challenge?

Is a viable new business model in the offing?

Tom Sanzillo is IEEFA’s director of finance.