In another sign of the collapsing prospects for West Coast coal exports, Cloud Peak Energy—one of the largest coal producers in the American West and the best positioned coal exporter in the vast Powder River Basin—recently announced that it had extricated itself from long-term contracts to move coal into Pacific Rim markets.
It was a costly retrenchment: the company gave up nearly $10 million that was held in escrow accounts and and it committed to make at least $51 million in payments to rail and port companies over the next two years.
Despite the costs, industry analysts generally cheered the move. As well they should have. Under prior contracts, Cloud Peak was on the hook for $475 million in port and rail fees from 2019 to 2024, even if the company had not shipped a single ton of coal from the West Coast.
Canceling these export contracts is remarkable about face. As recently as mid-2013, Cloud Peak executives practically bubbled with optimism about the company’s prospects for exporting coal into Pacific Rim coal markets, boasting to investors that they had made Asian exports the centerpiece of their corporate growth strategy.
The company ultimately committed hundreds of millions of dollars to an ambitious, multi-pronged export strategy, which included:
- Long-term contracts with rail company BNSF to ship coal from Powder River Basin mines to the coastal coal terminals;
- Long-term contracts with the Westshore export terminal in southwestern British Columbia to supply coal to ships bound for Asia;
- A 49 percent stake in the proposed Gateway Pacific coal export terminal outside Bellingham, Wash.;
- Port access rights at the proposed Millennium Bulk Terminal in Longview, Washington;
- Development of two new export-oriented coal mines in the Powder River basin.
That plan has unraveled.
China’s demand for coal, which once looked limitless, has fallen for three consecutive years now, driven by government policies designed to rein in pollution and modernize the nation’s economy. As Chinese coal demand has waned, prices have fallen—submerging Cloud Peak’s export business in a sea of red ink. As long ago as late 2015, Cloud Peak’s export losses were mounting so rapidly that the company decided it would be cheaper to pay shipping partners not to ship coal—a move that resulted in a completely write off of the value of its export contracts and port rights.
The U.S. coal export pipe dream continues to fade, hurting the coal industry’s balance sheets and leaving a lingering bad taste in the mouths of coal investors and executives alike.
Public policy has also taken a toll on Cloud Peak’s export ambitions. Last May, the U.K. Army Corps of Engineers halted development of the Gateway Pacific terminal, citing concerns over Native American treaty rights. The main company backing the terminal gave up on the project last month. This past December, the state of Washington denied a critical sublease to the Millennium terminal after the project’s backer failed to provide key information about whether it had a viable business plan, given the dismal state of international markets. There was also the fact that the terminal’s sole remaining partner pulled out of the project after declaring bankruptcy.
The terms of Cloud Peak’s new contracts undermine Millennium’s prospects still further. Cloud Peak gave the Westshore terminal the right of first refusal of coal export shipments through 2024, which would deny Millennium a key potential customer.
Cloud Peak’s streak of stumbles eased a bit last fall, after government-mandated cutbacks in Chinese coal production breathed some life into torpid coal markets. As seaborne coal prices ticked up, Cloud Peak managed to sign contracts to ship more than a million tons of coal to Korea. It was a far cry from the multi-million-ton export business the company had banked on—but much better than paying steep fees to export nothing at all as the company had done for most of the previous year.
Still, it’s clear that Cloud Peak’s has lost confidence in its export strategy. In his last investor call, the company’s CEO conceded that international competitors would always have a leg up on Cloud Peak in Asian markets:
“Realistically, we’re never going to be at the low—the bottom of the cost curve internationally because of just the distance we are from the coast and compared to Indonesia and to the customers compared to Indonesia. So, we need to recognize that and position ourselves accordingly.”
And even though international coal prices are much higher now than they were a year ago, the company sees that Pacific Rim coal futures prices are still too low for the company to lock in long-term profits. Moreover, Cloud Peak’s executive team seems to recognize that Pacific Rim coal prices are driven almost entirely by the whims of Chinese policymakers.
All of these developments help explain why Cloud Peak has removed Asian exports from the center of its corporate strategy, even as the company has begun to search for new domestic customers to replace its lost export opportunities.
Clark Williams-Derry is director of energy finance at the Sightline Institute in Seattle.