If you listen carefully, you might hear the sound of the “coal export bubble” popping. Coal prices are plummeting globally, and the bottom seems nowhere in sight. Early this month the price of benchmark Australian thermal coal fell below $77 per metric ton, down 46 percent from its 2011 peak.
In the heady days of two or three years ago, this benchmark price soared to nearly $142. U.S. companies trotted out ambitious proposals for six Northwest export terminals to ship Powder River Basin coal from Montana and Wyoming to Asia, where it could fetch these bloated prices. But as prices fell back to more realistic levels this past year, three of the projects were abandoned.
Similar coal mining and terminal plans are being shelved in Australia, where companies are slashing output and jobs. Ditto for Indonesia, which also depends on the Asian market for its coal exports.
Unfortunately for the coal industry, these plans assumed that coal prices would keep rising as they had until 2011, that China would continue to need more coal for its power plants than it could produce itself, and that its demand for imports would keep prices high for years.
But as we learned from the real-estate bubble of the past decade, which triggered the financial panic of 2008 and led to the Great Recession, smoothly rising economic projections can be awfully risky.
China’s own coal production is finally catching up with demand, which is slowing for several reasons, according to a recent report Goldman Sachs prepared for its investors — and another from Bernstein Research. One is the higher efficiency of its new power plants, which are now operating better than the U.S. average. Another is the fact that China is aggressively pursuing nuclear power and renewable energy.
According to the closely-held Goldman report, written during this year’s coal-price collapse, long-term import prices for Australian thermal coal will settle down — or perhaps inch up — to $85 per metric ton this decade.
Powder River Basin coal, which has lower heat content and is mined much further away from Asian markets, has to be priced at only 60 to 70 percent of the Australian benchmark to be competitive. So says a 2012 report from Cloud Peak Energy, a Wyoming coal company that is a pure play on this coal. By that measure, the projected price of this PRB coal would be only $46 to $54 per metric ton. But it costs U.S. companies $42 to $50 a ton to mine the coal, transport it by railroad over 1,000 miles to the Pacific coast, and load it aboard ships. That leaves little room for profit — and a great potential for loss — as the price drops.
By similar reasoning, the current benchmark price of $77 corresponds to $42 to $49 a ton for PRB coal. Little profit there! Cloud Peak executives must be getting nervous. Having relied on foreign exports to fill the deepening sales gaps due to declines in U.S. power-plant demand, they are getting boxed in. Look for a big drop in its profits this year.
The coal industry may be hoping for a rebound in the Chinese import market, which drives seaborne coal prices, but that is wishful thinking. China’s economy is slowing, and its government is finally awakening to the terrible human costs of rapid economic growth based on burning so much coal.
This past January the air pollution in Beijing rose above “crazy bad” levels, with the quantity of 2.5 micron particulate matter (the most damaging kind to our lungs) rising to 900 micrograms per cubic meter in some districts. That’s over 25 times higher than the maximum level considered healthy by the U.S. Environmental Protection Agency.
And a study by public-health researchers recently established that people in northern China, who rely on coal for heating, have a life expectancy 5.5 years less than those in southern China, who don’t. Another study estimated over a million premature deaths per year due to air pollution. Especially in the north, that is, people are dying early due to coal smoke.
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