Tom Power Commentary: “The Glimmer of Montana’s Black Gold Flickers a Bit”

Just as a public relations piece, masquerading as economic analysis, was released praising the proposed Otter Creek Mine and Tongue River Railroad for their magical powers to transform the Eastern Montana economy, Arch Coal, the huge coal company that has leased that coal, is stumbling financially. Arch Coal is also a major partner in the proposed new coal port near the mouth of the Columbia River that would allow Arch to export the Otter Creek coal to Asia.
In March of 2011 when Arch was the successful bidder for the Otter Creek coal, its stock was selling for about $35 per share. That price is now hovering around $6 a share. Four years ago that stock was selling for $75 a share.
Arch’s partner in the proposed Columbia River coal port, the Australian company, Ambre Energy, is also in financial difficulty. Ambre has yet to get a single project off the ground in Australia, having just been turned down by the state of Queensland for a proposed coal-to-liquids project similar to a proposal that Amber made in Montana several years ago that also led to nothing. Amber Energy has been forced to postpone its bid to become a publicly traded company in Australia because of little investor interest in its Initial Public Offering.
None of this is especially surprising. American coal markets are very weak right now both because of low natural gas prices and because of increasingly tight regulation of the pollution that is inevitably associated with burning coal. This last March the share of our electricity coming from coal fell to just one-third, the lowest level recorded since such statistics began to be gathered. The shift to cleaner burning and cheaper natural gas brought its share up to 30 percent, within a few percentage points of coal. American coal companies have tried to compensate for the losses in U.S. domestic markets by focusing on exports to foreign markets. But those increased exports have put downward pressure on world coal prices. The Newcastle Asian benchmark coal price index was $142 per tonne in January of this year but had tumbled to $87 earlier this month, a 40 percent decline, carrying the price close to, if not below, production costs at some Australian coal mines.
Meanwhile, earlier this month, one of the major markets for coal in Asia, China, was rejecting coal deliveries priced at the higher levels of the past. As a result as many as 30 huge dry bulk freighters, each carrying tens or hundreds of thousands of tons of coal floated off China’s coast, desperately dickering with potential buyers throughout east Asia to rescue some of the value from that coal.
One has to be careful not to read too much into such fluctuations in commodity market prices. A month or two of price movement in a particular direction does not make a permanent trend. Just as it was crazy to interpret the upward trend in Asian coal prices over the last two years as an endless and inevitable rise in coal prices, it would be silly to interpret the current downturn in a similar way.
The export of American coal, which has double over the last several years, is the only bright spot for the U.S. coal industry. But dumping over 100 million tons of American coal into the world market just as European demand has declined Asian demand growth has slowed has had predictable impacts, driving coal prices dramatically lower. Although that 100 million tons of American coal exports is the highest level in two decades, the proposed west coast coal ports that are in the permitting process right now would add another 150 million tons of export capacity focused on the same Asian markets.
Powder River Basin coal companies and their partners who want to build new coal ports to enable the exports to Asia have argued that their coal exports will not lead to any more coal being burned. Powder River Basin coal will simply displace coal from other sources with no net impact on greenhouse gas or other toxic emissions, or so the coal export promoters claim. But the impact of the current increase in American exports on world coal prices underlines the obvious flaw in that argument. Competition for shares of a limited market puts downward pressure on coal prices, pushing coal prices lower than they otherwise would be. Simple supply and demand.
When coal prices are lower, there is a demand response, more coal gets burned, less money gets invested in the efficiency of electric generation and electricity use, less money gets invested in alternative energy source, and more commitments get made to coal-fired electric generators that will spew out greenhouse gases for a half-century or more into the future. The cheaper something is, the less careful is our use of it. Just look at American’s energy use compared to European or Japanese use.
This should also remind us about the volatility of commodity markets. Montana lived with that volatility in copper markets and prices for over a century and with lumber markets and prices for half a century. It was economically disruptive and painful. Every time someone tells us that a current upward commodity price trend is sure to be permanent because “this time is different,” we should at least have the good sense to be skeptical. A new coal boom in Eastern Montana and a coal train boom in Western Montana is not a sure thing, nor, for better or worse, is it unlikely. The coal ports on the west coast are also not a sure thing, but they may well get built. Reality may well be as messy as mineral booms and busts of the past and the environmental, social, and economic disruption they left behind. What we can be sure of is that they will not be an unmixed economic blessing and almost certainly will be environmental catastrophes.
This new Montana coal boom is a “gift horse” into whose mouth we should definitely look carefully and critically. The 21st century is not the time for Montanans to be making another big commitment to dirty King Coal. We cannot afford it. Nor can the planet.

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