Promised upturn for American coal still a few years off
Throttled by several years of tumbling prices and plummeting demand for their coal, American miners keep hearing about a “new normal” they will have to confront.
Coal will have a role, analysts and executives say assuredly. The nation's electrical grid will need to burn some amount of it to remain reliable. The global oversupply will ease and prices will rise.
They don't know by how much, just that it will be less of a role, at prices lower than they were. And they don't know when.
“It was supposed to be 2017. Now, that's pushed to the right a little,” said John Pippy, CEO of the Pennsylvania Coal Alliance, discussing predictions for when a rise in natural gas prices might shift some demand back from the power sector.
“My prediction is, nothing good is going to happen in coal before 2018,” said Robert Murray, the CEO of Ohio-based Murray Energy. He expanded his coal empire while some competitors sought bankruptcy protection but is now contemplating such a move as he negotiates a new union contract.
“I may not make it until the end of the year,” he said.
A series of tough environmental regulations, coupled with unexpected competition from cheap shale gas, mild weather and global market forces caused an epic collapse in the U.S. coal industry over the past two years that resulted in dozens of the biggest producers going bankrupt and tens of thousands of layoffs.
The resulting cut in production — the estimate for 2016 puts it at the lowest level since the early 1980s — is painful but necessary, analysts and executives say.
“We're seeing the market adjusting,” said Andrew Moore, the Houston-based managing editor of S&P Global Platts Coal Trader.
How quickly that happens and which companies come out on top depends on some of the same factors that played out in coal's collapse: the price of natural gas, weather and the ability to operate efficiently.
“They're reorganizing. They're going to compete better with low-cost structure,” Moore said, noting that coal will remain necessary to power at least 30 percent of the U.S. electrical grid.
That's a lot less than the 52 percent share coal commanded just a decade ago. But it's enough for a few well-run, strategically positioned companies to thrive after a round of consolidation expected after the bankruptcies, executives say.
Murray has done the math. To power a third of the grid, power plants need about 600 million tons of coal. Running his mines three or four days a week, Murray expects to produce about 60 million tons this year, but says he could ramp up easily to more than 100.
“It's reasonable to assume … that a 100 million-ton (operation) could exist in a 600 million-ton industry if we're scattered over six states, which we are, and we have water transportation to most customers, which we do,” said Murray, who in 2013 bought five mines from Consol Energy and last year acquired Illinois basin miner Foresight Energy.
“That's one reason I see a future, but it's going to be a greatly reduced industry and you have to be very competitive in that industry, or you won't survive,” he said.
Natural gas effect
There's potential to grow a little beyond the 30 percent share and increase the power sector's coal consumption, but that depends on the fossil fuel that undermined coal.
“They should bet on gas,” Moore said, noting that higher gas prices have trouble competing with low-price coal.
Natural gas prices tumbled since 2013 to below $2 per million British thermal units last winter because of oversupply and tepid demand. If gas gets back above $4.50, though, wholesale electricity prices will rise and coal-fired power plants can become economical again.
“If you want to save coal, you want to build more gas plants. And more (liquefied natural gas) exports, greater exports to Mexico,” Moore said.
Higher demand will eat away at the supply and boost gas prices, making coal more competitive. And producers are looking to lower gas production and higher prices as a potential source of relief for coal.
“Oil and gas rig counts are plummeting, (exploration and production) companies have reduced access to credit, and natural gas futures are rallying,” said Jimmy Brock, CEO of CNX Coal Resources, the spinoff Consol formed to operate its mines below Greene and Washington counties. He recently told analysts that rising gas prices could improve coal markets in 2017 and '18.
That still will require more nimble and efficient mines, Brock and others say. CNX Coal adjusted its operations in those mines so that it can coordinate production from certain longwall mines with train arrivals for certain customers.
“Would we prefer to run all five longwalls? Yes,” said Jim McCaffrey, a senior vice president at CNX Coal, which idled one of those this year. “If we have to be flexible and move from one to another, that's what we'll do.”
Such coordination can pay off at mines such as Consol's and Murray's because of the type of coal they produce. Before the latest round of environmental regulations forced new pollution-control measures at power plants, utilities sought out lower-sulfur coal from Western states. But it generates less heating energy and costs more to transport east.
Northern Appalachian mines produce the highest heating energy. And 95 percent of remaining power plants have the technology to burn it while remaining in line with pollution rules, Pippy said.
“Our coal will be very valuable,” he said.
Murray said he's focused on serving power plants to which he can cheaply barge coal, drawing ellipses on maps around mines and looking for customers along the rivers.
He cites two remaining major challenges to surviving, though. The West Virginia mines he bought from Consol are union mines and the contract is up at the end of this year. Discussions with the union have gone nowhere, he said.
“They've not given me a bit of help. It looks like the United Mine Workers and its president just want me to dump $3.2 billion in liabilities and pensions in bankruptcy rather than help me,” he said.
Spokesman Phil Smith said the union is negotiating a new contract, but “we are not going to negotiate that contract in the media.”
“Mr. Murray can say what he wants. We will continue trying to reach a fair agreement at the bargaining table,” Smith said.
Even with union concessions, Murray said he worries about competing with companies that did file for bankruptcy protection. They could emerge with little debt, ready to quickly boost production.
“I have to compete with them as they drive the coal market and prices back down,” he said.
David Conti is the assistant business editor at the Tribune-Review. Reach him at 412-388-5802 or [email protected].