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  • benstevens75 benstevens75 Mar 28, 2013 9:16 AM Flag

    North America becoming big coal exporter as domestic consumption declines

    The North American coal industry is in transition; a significant decline in domestic consumption means that it is becoming a significant exporter of the fossil fuel to emerging economies, especially those in Asia.

    The domestic US coal market has seen a whirlwind decline in recent years as low-cost natural gas from recently embraced hydraulic fracturing has flooded the market, sending the coal market spiralling downward as US coal-fired power generators, which traditionally used about 90% of the local coal production, switched to burning cheaper natural gas.

    This has had a devastating effect on coal producers in the US, forcing a number of significant US coal producers, including Arch Coal, Alpha Natural Resources and Peabody Energy, to scale back production or shutter operations in recent months.

    The poor market conditions also resulted in a flurry of bankruptcy filings, including Patriot Coal and the reorganisation of junior Cline Mining.

    But, investment bank Headwaters MB mining and metals team MD Raymond McCormick tells Mining Weekly the emerging export demand from emerging economies is driving a new chapter in the US coal market.

    “The burgeoning industries in China, Japan and India are aiding growth. This represents a great opportunity for US coal markets, but it all depends on whether the US is able to increase its port coal-handling facilities to take advantage of this opportunity,” he said.

    McCormick says demand for thermal and coking coal is set to rise. For thermal coal alone, it is estimated there are about 288 GW of new coal-fired power generation capacity under construction globally, which would add about 850-million tons of demand.

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    • Long-term projections made by the US Energy Information Administration (EIA), predicted coal would become the world's primary fuel for electricity generation within the next few years.

      “By 2015, it is estimated there will be about 470 GW of coal power generation on line, requiring about 1.4-billion short tons of thermal coal,” he says.

      Domestic coal demand is also expected to increase marginally this year, as the price of gas has this year already increased by about 20% year-on-year, making it a sensible move for power producers to once more switch to burning cheaper coal. Natural gas recently traded at $3.87/mmBtu, while Eastern coal was selling at $2.40/mmBtu.

      The domestic US coal market, which, according to the World Energy Council’s Survey of Energy Resources 2010, included an estimated 237.29-billion tons or 22.6% of the world’s proven recoverable coal reserves as at the end of 2008, was expected to grow this year to 842-million tons, compared with the 870-million tons in 2012. This compared with a domestic market comprising more than one-billion tons of coal just before the global financial crisis of 2007/08.

      For coal prices to really show a northward movement, the industry has to get the total coal inventory down. It was at historically high levels of about 200-million tons in 2012 and McCormick saw an ideal inventory level at about 150-million tons for the market to leverage the best prices.

      Recently, the US EIA said the US coal market might have received a small boost from coal supply disruptions in Colombia, which included a strike at its largest exporter, Cerrejon. Force majeure, a contract clause that allows a company to suspend contractual obligations in the face of unexpected events, was declared on several coal shipments destined for markets in Europe and the US.

      • 2 Replies to benstevens75
      • Check out this Forbes article posted today "Leaving King Coal Breathless" Very concerning.

        Also new regulations preventing the new coal export terminals from being built over climate change issues will drastically affect U.S. ability to meet world wide demand.

        I've got substantial positions in ANR, BTU, and ACI. Without gov't regs threatening coal use in the U.S. and coal exports I think coal would be a no brainer. Still holding, but man this is a tough one.

      • As a result of the sluggish US economy and lower growth rates from the leading developing countries in recent months, McCormick points out mergers and acquisitions (M&A) in North America have been quite anaemic, with only about 11 notable deals, totalling about $3.2-billion, having taken place in 2012 – half of which took place in Canada.

        Between 2008 and 2011, there were about 22 M&A transactions internationally, totalling $75-billion or an average of about $3.3-billion per transaction.

        “Equities have taken a beating. Since 2011, of the 11 public coal companies, eight were downgraded and the companies’ combined equities were down by about 50%,” he says.

        However, many of the coal companies, including Peabody Energy, Consol Energy and Alpha Natural Resources were sitting on sizeable amounts of cash in the bank and some still managed cash flows of more than a billion dollars a year. McCormick says many of these companies have positioned themselves to weather the market lull and be ready to rapidly increase production when the market revives.

        However, many companies have a high debt-to-capital ratio, making cost management critical and asset sales likely as the companies try to reduce their capital burn rate, boost funds and increase cash flows.

        “The companies’ priorities at present are to manage capital and conserve cash, while they wait out the storm,” McCormick says.

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