Why the market will be the death of coal ports

Guest opinion: The coal bubble is bursting, making coal exports and terminals a foolish investment.
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Guest opinion: The coal bubble is bursting, making coal exports and terminals a foolish investment.

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.

Chinese officials are finally beginning to admit and grapple with this terrible problem. Not only is there a major push for renewable energy sources, but also a nascent attempt to put a price on carbon burning. The southern city of Shenzen, across from Hong Kong, has initiated a cap-and-trade system to reduce carbon-dioxide emissions. Several other cities will soon follow suit.

Coal burning will be heavily impacted, and Chinese imports of thermal coal will fare even worse, probably dropping to zero by 2015, according to the Bernstein report. Global prices will continue plummeting due to oversupply.

This is a grim scenario indeed for companies like SSA Marine of Seattle, which proposed the Gateway Pacific Terminal at Cherry Point near Bellingham, WA, now in the early stages of its environmental impact assessment. Planners probably counted on the benchmark coal prices staying above $100 in making the economic case for the port. Now that they are likely to remain below $85 for years, things don’t look so rosy.

In fact, the Goldman report states that coal-mining and transport projects that come on line more than five years from now are unlikely to earn back their capital investments. Given the staunch environmental opposition to the Cherry Point project, it will take at least that long, if ever, before it begins operation. And as Goldman Sachs owns 51 percent of SSA Marine, it makes me wonder whether company executives are reading their own investment reports.

The core problem seems inescapable: These companies are hoping to transport and sell low-grade, subsidized U.S. coal thousands of miles further than the better, nearer stuff from Australia and Indonesia. And the market is drying up rapidly. It doesn’t make economic sense.

So here’s a prediction: Watch for one of the remaining Northwest coal terminal projects — if not all three — to be cancelled by year’s end. You can quote me on that.

Maybe the cruel, Darwinian free market will work out, after all, so we can bury these fossil dinosaurs and leave the coal in the ground until means can be developed to burn it cleanly, without adding to the atmospheric overburden of carbon dioxide.


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