Why you should care
With no help from the Trump administration, the coal industry is growing, thanks to global demand.
On the campaign trail in 2016, President Donald Trump often pledged to bring back coal. For mine workers, that promise remains unfulfilled. The number of jobs in coal mining in the U.S. is up only 800 since Trump’s inauguration in January 2017, and has been on a declining trend since last October. For some investors in the coal industry, however, the past 15 months have been rewarding as some U.S. coal companies have prospered — but Trump’s policies had little to do with it.
Peabody Energy, the world’s largest private sector coal producer, entered Chapter 11 bankruptcy protection in 2016. It returned to the stock market in April last year, having shed $5.2 billion of debt, and its shares have subsequently risen by 17 percent.
Alpha Natural Resources, another leading U.S. coal producer, filed for bankruptcy in 2015, and was subsequently broken up, with some of its assets being bought by a new company called Contura Energy, owned by Alpha’s lenders. On Monday, Contura and the remnants of Alpha announced that they were merging to reunite the business, albeit in a greatly slimmed-down form. The merged company, which will retain the Contura name, is aiming to list on the New York Stock Exchange by the end of September.
Trump’s attack on the climate policies of his predecessor Barack Obama, including plans to withdraw from the Paris climate agreement and to scrap new regulations on carbon dioxide emissions from power generation, have apparently had little effect. The amount of electricity generated from coal in the U.S. dropped by 2 percent last year, and is expected to drop by a further 3 percent this year. Nor do the Trump administration’s attempts to ease the regulatory burden on coal mining appear to have had a noticeable effect yet. Peabody’s U.S. operating costs per ton were up 4 percent in the first quarter of this year compared with the equivalent period of 2017.
The big difference has come from a surge in demand in international markets, for both thermal coal used in power plants and metallurgical, or “met,” coal, which is used in blast furnaces to make steel. U.S. exports of thermal coal more than doubled last year, thanks to strong demand from countries including India, South Korea and Japan.
But it is met coal that is causing the greatest excitement, throwing a lifeline to Appalachia, the region running from Pennsylvania to Alabama that is the traditional heartland of the U.S. industry.
Export demand for met coal has been one of the few bright spots.
Kevin Book, ClearView Energy Partners
“The plight of the Appalachian producers has been grim,” says Kevin Book of ClearView Energy Partners, a research firm. “And export demand for met coal has been one of the few bright spots.”
The reasons have been factors beyond the Trump administration’s control. Cyclone Debbie, which hit eastern Australia in March last year, caused widespread disruption to much of the country’s met coal production, and its industry has been struggling to make up the shortfall. Meanwhile, China has been intermittently curbing its coal production, while its demand has grown. A crackdown on steel production from old-fashioned induction furnaces had boosted activity at blast furnaces and hence demand for met coal, says David Lipschitz, an analyst at Macquarie.
The result has been soaring prices for met coal worldwide, including in the U.S. The S&P Global Platts U.S. met coal price rose from about $80 a ton at the start of 2016 to a peak of $295 a ton last year, and even though it has since fallen, it is still about $180 a ton today. Met coal production has been lucrative for U.S. producers and for Peabody, which mines it in Australia.
Peabody’s first-quarter earnings, published last week, showed a clear divide: At the Australian operations, which principally produce met coal, earnings before interest, taxes, depreciation and amortization were up 23 percent, while at the U.S. operations, which produce thermal coal, they were down 28 percent.
Overall, the net effect was that Peabody generated record free cash flow in the quarter of $573 million. It has been able to expand its planned share buyback program from $500 million to $1 billion.
“A lot of our focus in 2017 was on cash retention and paying down debt,” says Glenn Kellow, CEO. “We expect this year to be focused on returning cash to shareholders.”
The prospect of similarly being able to cash in on met coal is the big attraction in the Contura-Alpha deal. The merged company will be the largest U.S. met coal supplier, and Contura expects the world seaborne market to keep growing, from 321 million tons last year to 345 million tons in 2019, as worldwide steel production continues to increase.
Ironically, Book points out, one threat to that attractive prospect might be a cut in steel production in China and other countries because of the tariffs on imports imposed by Trump.
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2018.