Coal Exports Boom; Greens Set Hurdles

Investor's Business Daily

American coal is looking for love and not finding much of it at home, but the story is different overseas. There, coal has plenty of fans. The vexing question is how to get it to them.

The U.S. has unmatched coal reserves, not just abundant but also cheap to mine. Europe remains a major market, especially for coal used in steelmaking. Asia is a fast-growing market for the "steam coal" used in power generation and produced in the Powder River Basin of Wyoming and Montana. This coal can be mined at low cost, carried by train to the West Coast, shipped to Asia and sold there profitably.

But first it has to get past a political choke point. Coal producers need new port facilities for loading coal onto ships, and anti-coal groups are doing all they can to block the projects.

At stake is a potentially lucrative trade to fast-growing, coal-dependent Asian countries, most notably China and India.

Coal now brings $100 per metric ton at China's southern seaports of Guangdong province, but it costs only $10 to $15 per ton at the mine in the Powder River Basin, says Richard Morse, who directs coal market research for Stanford University's Program on Energy and Sustainable Development. Rail shipping to the West Coast runs from $40 to $45, and port processing adds another $5 to $10. Shipping across the Pacific costs $15 to $30. That adds up to a total cost of $70 to $100, for a profit of up to $30 for every metric ton — or twice the cost of mining it.

The pull of those strong overseas prices is one reason why U.S. coal exports surged 31% to 107 million short tons in 2011, according to the Energy Information Administration. Another is the push of a weak U.S. market.

Mining, Rail BenefitsWith tough air pollution rules, competition from low-cost natural gas and (recently) warm winter weather sapping demand at home, exports have become a lifeline for big U.S. producers such as Arch Coal (ACI - News) and Peabody Energy (BTU - News). Both have lost more than half their market value over the past year; Arch Coal is down 74%. Weaker coal shipments also have hurt major rail operators such as CSX Corp. (CSX - News) and Union Pacific (UNP - News).

Exports can also be crucial to states that rely on coal production for revenue and jobs. In Wyoming, now the epicenter of U.S. coal mining, royalties from mining on federal lands totaled $598 million in the 2011 federal fiscal year, and the state got 48% of that. In addition, the state expects to get $592 million in coal severance taxes in 2011 and 2012. And though coal mining is not a major job producer on a national scale, it can have a big local impact as it rises and falls.

Transporting coal can also be a boost to communities looking for development. To take one example: A coal port project proposed near Longview, Wash., earlier this year but now on hold because of opposition from environmentalists, would replace a shuttered Reynolds Metals Co. plant that has been closed for a decade. The new facility would cost $600 million to build and — according to the owner, Millennium Bulk Terminals — would create 2,650 jobs during construction and 300 permanent jobs after that. The company says it would generate $235 million in state and local tax revenue over 30 years.

And that's just one of at least six coal ports proposed for the Pacific Northwest, from Coos Bay, Ore., to Bellingham, Wash. This is where geography and economics have combined to create a political battleground. If all six were built, the U.S. would get the capacity to ship another 150 million tons a year overseas and, if demand permits, more than double its current export volume. But the projects have drawn fire from environmentalists over coal dust, noise and other local concerns, along with global issues such as the burning of greenhouse gases.

Oregon Gov. John Kitzhaber threw his weight behind the opponents when he wrote Obama administration officials April 25 to request a federal environmental study covering "both the cumulative effects of coal transport the West Coast, and the effects of the use of that coal to produce energy in Asia here in the United States.

What makes the proposed projects controversial is not so much the activity of all the trains, barges and ships but the cargo. To those who want the industry to fade away, the Pacific Northwest ports are a step in the wrong direction.

Critics also say exports would boost coal and greenhouse gases by making coal cheaper. A 2011 report by the Sightline Institute, a Seattle-based advocacy group, concludes that the Pacific Northwest coal port projects would, "undermine China's progress towards more efficient power generation and usage.

The report's author, economist Thomas Power, says China has "enormous room for improvement" in energy efficiency and does cut back on consumption if energy costs rise. "They're behaving the same way that Americans do and Europeans do in reacting to price," he says.

Stanford's Morse agrees that cheaper coal can lead to more consumption but not in China, where, he says, "demand for coal is inelastic right now and most state-owned generators are so insensitive to price they have been burning coal at a loss for the last three years.

India Needs CoalIndia is another story. Unlike China, it cannot produce enough coal to meet domestic demand, and Morse says import prices have a real impact: "The high cost of coal imports to India, which are difficult for domestic power prices to absorb, actually causes some generators not to run and has made financing new coal plants difficult.

Whatever the impact of coal prices on consumption, U.S. exports are not the only factor influencing them. Australia and Indonesia are much bigger players (each exports about three times as much as the U.S.) and are closer to the key Asian markets.

American Mining Association spokesperson Luke Popovich sums up the industry view: "If you look right now at the volume of coal use in China and India, and then look at the volume of greenhouse gases that these countries now contribute to the global total, and then look at the percentage of coal utilization they will derive from the United States," the impact of U.S. exports "has to be very small.

If the U.S. decides to keep its coal in the ground, Popovich adds, others will fill the gap and reap the economic rewards: "Are we going to be on the sidelines or are we going to be in the game? That's the choice policy makers are going to have to make."

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