Tom Power Commentary: “The Rush to Export Coal: A National Frenzy”

It may be of little comfort to residents of the Pacific Northwest who are wrestling with the implications of dozens of mile-long coal trains disrupting their communities each day, but it is not only their own backyards that may be impacted by the explosion of interest in exporting coal to the rest of the world. There has been a virtual flood of proposals across the nation for new or expanded coal ports. They have been proposed on Lake Superior and the St. Lawrence Seaway. The ports of Huston and Corpus Christi, Texas, are planning to expand their coal export capacities. Ports on the lower Mississippi, upriver from New Orleans, are planning to do the same. Eastern coal mines, facing both declining domestic coal consumption and increased competition from Powder River Basin coal, are also focused on boosting their exports using existing and expanded east coast ports. Back on the west coast Mexico is exploring participating in this latest economic bubble with a coal port on the Gulf of California. Alaska and northern British Columbia have also jumped into the coal export free-for-all.
This focus on substantially expanding American coal exports is a relatively new phenomenon. American coal in the past has been too expensive to produce and the shipping distances too long for the U.S. to play much of a role in world coal trade. But over the last several years world coal prices have skyrocketed. Initially it was the price the rest of the world was willing to pay for the high Btu hard coal used in steel making, what is called metallurgical coal, that caught eastern coal companies’ attention. As that price tripled to over $300 per ton, eastern coal producers could ship that coal anywhere in the world and still make a profit. As a result American metallurgical coal exports surged.
But initially, thermal coal, the low Btu soft coal such as the Powder River Basin produces that is burned primarily to generate electricity, had too low a value on the international market to justify the high shipping costs associated with this bulky material. But as the price of thermal coal in Asian markets soared close to $140 per ton, it appeared that that much more abundant type of coal could also be shipped almost anywhere in the world at a profit. Hence the explosion of interest in coal exports by American coal mines throughout the nation.
But these unusually high coal prices on the world market had very specific sources: A year and a half ago catastrophic floods closed close to three-quarters of Australian coal mines, one of the major sources of both metallurgical and thermal coal to Asia. Indonesian coal mines, the largest suppliers of coal to China, also flooded. At the same time, the Chinese were reorganizing their coal industry, shutting down the smaller, less safe, and more heavily polluting mines, and forcing others to consolidate into larger, more modern, mining operations. This disrupted coal production within China. The demand for thermal coal for electricity production in Asia also shot up during 2011 because of the March nuclear catastrophe in Japan that led to at least temporary shutdowns of nuclear generating plants in Japan and elsewhere in Asia.
Spikes in commodity prices such as coal are usually quite temporary because they trigger two well-known responses. First, they discourage use of the now more costly commodity or encourage more careful and efficient use of it. Demand declines. In addition, the higher prices justify bringing more expensive sources of supply on line, increasing the supply. Both of these market responses tend to push the price back down again.
That sort of adjustment is evident in world coal markets right now. Both metallurgical and thermal coal prices are coming down. Coal market analysts are predicting that metallurgical coal prices may fall as much as a third from their previous peak by the end of this year. As a result, some of the more expensive sources that are furthest away from the steel making centers of Japan and China, such as some American sources, will no longer be able to compete.
In addition, the high price of imported coal has led thermal coal buyers in China and India to rethink their reliance on coal imports and refocus instead on boosting domestic coal production and other non-coal fuel sources. As a result, between May 2011 and May 2012, the Australian coal export price index declined by 27 percent. Instead of looking at selling PRB coal for $130 a ton to Asia, potential coal exporters now face a price of about $80. $50 per ton of potential profit has simply disappeared.
Coal prices within the U.S. are also plummeting because of reduced demand, with Powder River Basin coal prices falling to their lowest level ever when expressed in inflation adjusted terms.
Obviously all of the proposed new and expanded coal ports across the nation are not going to be built. They are premised on temporarily high Asian coal import prices. The proposals to ship thermal coal from the east and Gulf coasts are also premised on the possibility that new west coast coal ports will not be built. If some of those west coast coal ports are built, shipping coal from the Gulf and east coasts will not be competitive with Powder River Basin coal shipped to Asia from those west coast ports.
This complicated tangle of economic forces makes predictions about future American coal exports very uncertain. An explosive expansion of American coal exports is not inevitable. Economic and political forces both within the U.S. and in Asian countries could substantially change the economic landscape that coal producers and coal users currently see and assume is permanent.
Citizen groups in both China and India are struggling to reduce coal mining, shipping, and burning that threaten their communities and their health. Americans are also turning away from “King Coal” and acting to protect themselves from the same impacts. These political responses to the actual full social costs of coal will also have significant economic impacts on the viability of coal exports. In that sense, our energy future is still in our hands and the hands of citizen activists around the country and around the world.

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