Tom Power Commentary: “The Instability Inherent in the Coal Industry”

The current turmoil in domestic and international coal markets illustrates the cyclical nature of coal and other commodity industries. The fluctuations in production, price, employment and income make it difficult for mining towns and other areas supporting the processing and shipment of the raw materials to develop into prosperous, sustainable, communities.
There has been much enthusiastic talk about Wyoming and Montana coal serving what is usually presented as the almost unlimited demand for coal in China and India. All we have to do is get the coal from the Northern Great Plains to west coast ports, which, of course, do not exist yet. Accompanying that enthusiasm for coal exports, not surprisingly, also comes apprehension and distress to those living in the vicinity of the mines, railroad routes, and coal ports, who would have to live with the environmental and social consequences of a new coal boom.
This enthusiasm for developing new coal for export to Asia is partially explained by the fact that overall American consumption for the sort of thermal coal that Wyoming and Montana produce for electric generators has been declining since 2008 and is expected to continue to decline through at least 2015. After that, federal number crunchers project that it will not be until 2031 that national consumption of thermal coal will return to 2010 levels. Thus the thermal coal industry across the United States faces almost a decade of serious decline in coal demand and then a very slow recovery, in short, two decades of stagnating demand for coal.
As a result, one major coal company, Patriot Coal, has filed for bankruptcy and by one estimate at least 2,000 coal miners have been laid off recently, especially in the Appalachian coal fields. Arch Coal, one of the active players in the Powder River Basin, including Montana, has laid off 600 workers, mostly in its Appalachian operations. However, coal mines in the Powder River Basin of Wyoming and Montana have also begun laying off coal miners.
These financial problems for coal companies should not be surprising. Spot market coal prices at the mine mouth in the Powder River Basin are at their lowest level ever when those prices are expressed in dollars of current purchasing power. In 2010 the average price of Powder River Basin coal was over $14 a ton. Now it is about $8.50 per ton, forty percent lower. That can put a real dent in the bottom line.
In the 1980s Powder River Basin coal sold for about $25 per ton. During the 1990s, with major gains in mining productivity, that price tumbled down to about $10 a ton in today’s dollars. In 2001 it actually got as low as $8.50 a ton; its price today. But the price of Powder River Basin coal then rebounded by 50 percent in the 2000s before the current price slump hit and pushed the price back to record lows.
It is not clear that exporting coal to Asia will be a solution. Coal prices are tumbling there too as demand shrivels and coal storage piles grow. The Australian coal price index is at its lowest level since the end of 2009. The Chinese coastal coal price index has fallen by about a quarter and many of China’s large coal mining companies have made significant layoffs, just as American coal companies have been doing.
The competition among coal companies for access to shrinking markets has also led to some legal conflicts. Ambre Energy, a new Australian coal company and the primary sponsor of the Longview, WA, coal port on the Columbia, is being sued by Cloud Peak Energy over control of the Decker Mine in Montana along the Wyoming border. A year or so ago, Ambre bought out the half-interest of another mining company and became 50-50 partners with Cloud Peak in operating the Decker Mine. Cloud Peak, which also owns another mine adjacent to the Decker Mine, hopes to expand that adjacent mine and phase out the Decker Mine because it has become too costly to operate. It has been losing money and Cloud Peak’s plan has been to shut it down and begin final reclamation of the mine site.
Ambre Energy bought half of that money-losing mine both to demonstrate that it was a “player” in the Powder River Basin and because, with its proposed coal port on the Columbia, it hoped to have access to Asian markets where, again, it hoped to obtain higher prices than were available in the domestic U.S. market. That, Ambre believed, would make its part of the Decker mine profitable again. Since access to that higher Asian price would be due to Ambre’s proposed west coast coal ports, Ambre did not plan to share those profits with its partner, Cloud Peak. Instead, apparently, Ambre plans to sell the coal to itself at Powder River Basin mine-mouth prices, and proceed to export the coal to Asia through the west coast coal ports it plans to build. Cloud Peak is not very enthusiastic about this “self-dealing” by its partner, nor does it want to share in the losses if the Decker coal continues to have to be sold in the U.S.
This battle between these regional coal mining companies simply underline the speculative nature of the coal industry and the markets it faces. Neither insiders nor outsiders know whether coal-fired electric generation will survive the long-delayed application of the Clean Air Act to coal’s toxic pollutants and greenhouse gases. Nor do we know whether natural gas will win the competition to fuel electric generators on into the future. If new coal ports do not get built on the west coast, it is unlikely that U.S. coal can compete in future Asian markets were coal prices are not likely to be as high as they have been over the last several years. Existing American coal ports are just too far away from Asian markets as well as from cheap Powder River Basin coal.
Finally there is the constantly fluctuating coal demand and prices and the ongoing displacement of coal miners by more and more automated equipment. Through coal’s regular booms and busts, that technology steadily reduces the payoff in terms of jobs and payroll to local communities who have to live with the permanently degraded natural environments that are left behind.
Wishful thinking aside, the fact that Appalachia is not only synonymous with the history of American coal production but also synonymous with century-long persistent poverty ought to tell communities something important about the ability of coal mining and exports to bring sustained and shared prosperity to their communities.

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