Why you should care
Despite the president’s emphasis on lifting the region, American coal country is struggling to return to its past glory.
The Powder River Basin of Wyoming and Montana was meant to weather the shift toward cleaner energy. If some in the energy business were skeptical about U.S. President Donald Trump’s promises of a renaissance for coal, many at least expected the PRB would keep finding buyers for its brand of low-sulfur coal, which can be extracted cheaply from open-pit mines.
But even the largest coal mining region in the U.S. is in relentless decline, with bankruptcies sweeping across the area as electric power plants burn far less than previously anticipated. Coal has lost market share in the electricity sector to natural gas and renewable fuels such as wind and solar. It now accounts for less than a quarter of total U.S. generation, compared with almost 40 percent five years ago.
“It’s hard to talk about the PRB without at least acknowledging there’s a pretty tough story out there,” Paul Lang, chief operating officer at Arch Coal, one of the area’s biggest producers, told analysts last week.
It seems unlikely that [Trump’s policies] will save many coal plants from ultimately shutting down.
Charlie Palmer, Opportune
The pace of decline has surprised analysts and upturned the business landscape. Arch and fellow coal producer Peabody Energy are seeking approval for a joint venture that would save them $120 million a year by combining operations including North Antelope Rochelle and Black Thunder, the two biggest mines in the basin. Assets of rival miners Blackjewel and Cloud Peak Energy were auctioned last week after each filed for bankruptcy protection this year.
Separately, American Electric Power this month said it would retire a massive 1,300-megawatt unit at its power plant in Rockport, Indiana, to settle a lawsuit over air pollution. U.S. power companies have announced retirements of more than 546 coal-fired power units amounting to about 102,000 MW of capacity this decade, according to the Energy Information Administration.
The EIA now predicts U.S. power stations will consume 537.7 million short tons of coal this year, 74 million less than it forecast 12 months ago. The 2.2 percent fall in U.S. carbon dioxide emissions the government agency expects from energy use this year is almost entirely due to lower coal consumption.
Trump has embraced what he has called “clean, beautiful coal.” At a rally in Montana last November, he said that coal miners were “all back to work.” The number of U.S. coal mining jobs has risen by about 2,000 to 53,000 since his inauguration but remains well below levels earlier in the decade. Wyoming mine employment has been contracting.
His administration last month introduced rules to help the industry by letting coal-fired power plants run more frequently. However, “it seems unlikely that it will save many coal plants from ultimately shutting down” in the face of falling costs for renewable energy and battery storage, says Charlie Palmer, managing director at Opportune, a consultancy.
The Powder River Basin, first mined in the 1970s, rose to become the most prolific coal region in the United States. Output peaked in 2008 at 496 million short tons. After miners such as Peabody and Arch emerged from an earlier wave of bankruptcies, optimism briefly returned in 2017 as they took advantage of a fleeting rise in natural gas prices to increase production in the hope of regaining market share.
Volumes have again turned lower. John Hanou, a consultant, estimates the basin will produce 301 million short tons of coal this year, the lowest since 1996. His base case calls for 232 million short tons of demand for PRB coal by 2030.
Another reason why the basin’s coal is suffering is because it creates less heat than other grades. Prices for its coal have stagnated at about $12 per short ton, while prices for hotter-burning varieties from Appalachia have increased to $50 or more, as newer power plants use scrubbers to remove their higher amounts of sulfur, a pollutant, says Ben Nelson, a senior credit officer at Moody’s.
Arch Coal sold 34.3 million short tons of Powder River Basin coal in the first half of 2019, down 4.2 million short tons from a year earlier, while its cash profit margin dropped by 40 cents to below $1 per ton sold. It has already curtailed operations at its Coal Creek mine in Wyoming “rather than pursue uneconomic business,” it said in a securities filing.
On Wednesday, Peabody reported sales of 50.3 million short tons in the basin in the first half, down 8.3 million short tons from a year earlier, and a drop in profitability. Glenn Kellow, the chief executive, acknowledges “challenges” for the region. “We understand how tough it is in that county,” he says.
The troubles underlined the reasoning behind Peabody’s joint venture with Arch, which would bring together mines that produce more than half the basin’s coal. “For us, this is about day-in, day-out competition versus natural gas and renewables,” Kellow says.
Extreme weather has also added to difficulties for the sector. Abnormal spring floods halted coal trains in the U.S. Midwest, an important destination for PRB coal. Cloud Peak Energy faced a cash crunch after rainfall that was 50 percent above average caused waste rock to slide into its coal pit last year, forcing it to divert mining machinery to the clean-up, according to a bankruptcy court filing.
Blackjewel’s two Wyoming mines shut down immediately when emergency financing collapsed on the eve of its July 1 bankruptcy petition. Hundreds of workers were locked out of the mines and their paychecks delayed.
Blackjewel acquired the two mines from Contura Energy in 2017. In last week’s auction, Contura — formed from the formerly bankrupt Alpha Natural Resources — stepped up as a stalking-horse bidder for the mines it once owned, and then successfully bid $33.75 million for Blackjewel’s two Wyoming assets, plus a third mine in West Virginia.
“As we look out, we think this is going to be a very difficult environment for PRB coal,” says Nelson. “Of the 15 or 16 mines that are there today, as we move through the next decade a number of them are going to shut down.”
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2020.