Another Difficult Year Ahead for U.S. Coal Producers

The story of Arch Coal Inc. is the story of the U.S. coal industry in a thumbnail.

The company is shrinking. The question: How small, how fast. The decline of U.S. coal has been both steady and precipitous, and Arch’s stock performance since the mid-2000s illustrates that trend in simple and stark numbers.

The S&P 500 Index—a broad gauge of U.S. stocks—is up 12 percent this year. Arch stock is down 62 percent. The S&P has gone up 80 percent of the past five years while Arch has lost 94 percent of its value over that period of time. And on a 10-year timeline, Arch stock is off 92 percent while the S&P has risen 71 percent.

To be sure, U.S. coal producers will continue to produce coal for years to come. They just won’t produce as much of it and they will certainly not meet their pie-in-the sky goal of becoming enormous suppliers to foreign markets.

American coal companies have faltered to the point that their performance no longer correlates with the ups and downs of the economy, which has been improving gradually since the Great Recession of 2007-2009 while the coal industry has stumbled. This decoupling between broader economic indicators and coal-company performance is unprecedented, and it tells us very pointedly that this particular fossil fuel is no longer intrinsically linked to the growth of the U.S. economy.

It’s not likely that a turnaround—if it comes at all—will begin anytime soon. This will be another low-growth year at best for U.S. producers, and that pattern will probably persist through 2016. Time is not on their side because robust pricing is required to pay off a looming wall of debts that come due in a few years, and coal companies also need more capital to help incentivize new production. Industry challenges include the rise of renewables and the emergence of a cheap alternative to coal: natural gas.

A shrinking industry typically consolidates, and that’s what seems likely here.

It is less likely that greenfield resources will ever be developed, and this is a truth that will prove especially painful to companies like Arch, which has banked so heavily on development of Powder River Basin coal in Montana and Wyoming. That region is a viable export-production area only if coal producers see a significant increase in the global price of coal; if Indonesian, Australian, South African, Russian and Indian coal producers falter; and if coal-export port proposals in the Pacific Northwest receive approval despite growing public opposition and Wall Street skepticism.

U.S. coal-production salvation, in other words, doesn’t look like it will come from foreign markets, as some industry advocates argue. India—where IEEFA has done considerable research on the energy markets—has less and less appetite for importing coal it can mine more cheaply domestically, and its policy choices are shifting steadily toward populist-driven development of renewables. Our research sees China’s demand for coal peaking in 2016 as that country, too, develops cleaner ways to produce energy.

Some industry observers have wondered whether American coal companies are destined for a fate similar to that seen a generation ago in the American tobacco industry, which saw its domestic market drastically reduced by backlash regulation due to public health concerns, but then found a profitable business niche in an international strategy.

The coal industry should be so lucky  Coal producers face a much different future than the tobacco industry, and that’s because China has decided against coal for reasons of public health, other countries are concerned about pollution and climate risk, and the market price of coal globally is low and likely to stay that way.

Tom Sanzillo is IEEFA’s director of finance.