Coal: A 'Million Dollar Mile' Getting Longer In the U.S.

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With cheap domestic natural gas prices and tighter environmental regulations, U.S. demand for coal has fallen in recent years. So coal export has become ever more important to domestic coal producers. With accelerating growth in economy and power demand, Asia is the obvious new export target for U.S. coal. U.S. coal shipments outside the country in 2014 are expected to surpass 100 million tons for the third year (see chart below). 

 


 

 

Data Source: EIA, U.S. Energy Dept.

East, Pacific Northwest, Gulf?

 

Typically, coal is transported via rail, truck to the port terminal and then exported by large dry bulk cargo ships. But the aging port infrastructure in the U.S. is already struggling with capacity issue. The capacity along the east coast is strained with increasing US coal exports to Europe.

 

 

 

Map Source: Platts 

 

Theoretically, Pacific Northwest would be the best location for new coal terminals to serve the booming Asian market. The western region (including the Power River Basin) is the top coal producing area in the U.S. according to the U.S. Energy Dept. However, active environmentalism in Washington and Oregon has managed to block almost every major proposal for now coal terminal.

 

 

 

Data Source: EIA, U.S. Energy Dept.

Frustrated, coal producers in the Powder River Basin are willing to pay a higher transit fee to use terminals in Vancouver, Prince Rupert, and British Columbia, Canada. But Canadian ports are also having capacity issue handling the surging coal export volume from the U.S. For now, Gulf of Mexico, where local governments and citizens are friendlier to the traditional energy and fossil-fuel industries, seems the best option where additional capacity in the near-term could be more likely.

China, Europe or South America?

As a result, some U.S. producers have shifted to target markets that are closer, such as Europe and Brazil. Europe is implementing more pollution-control measures on power plants to wean itself from nuclear power after Japan’s Fukushima disaster, as well as natural gas to reduce the supply dependency on Russia. In fact, UK was the top foreign buyer of American coal in 2013. 

 

 

Increasing Global Coal Demand

According to IEA, although U.S. coal demand has dropped to 24-year low, the black rock is still the world’s fastest-growing energy source, forecast to rise 2.3 percent a year through 2018 and is the second-largest source behind oil.

 

World Energy Demand by Fuel 

 

 

Chart Source: Coal Medium Term Market Outlook 2013, IEA 

 

The coal demand growth is driven mostly by non-OECD countries with China leading the way. China is world’s top coal producer, but the nation is also plagued by dangerous coal mining conditions and transport congestion. So China will continue to need more coal to feed its energy requirement. As long as China’s economy holds up, U.S. coal companies should benefit.

From NIMBY to NIYBY

However, a lot of the upside of coal export hinges on new export capacity gets approved and built in the U.S. and ocean bulk freight stays low.

Coal companies are eager to pour money into new terminals. Bloomberg reported that Oakland, California just recently rejected a coal export facility proposed by Bowie Resource Partners LLC despite the promise of ‘thousands’ of new construction jobs and a $3 million-a-year payroll in city. The message from Oakland: "Whatever the economic benefit would’ve been, it wasn’t worth destroying the planet over.” (Note: Oakland’s unemployment rate is higher than that of the national average as well as California.)

As the environmental cause has evolved from NIMBY (Not in My Back Yard) to NIYBY (Not in Your Back Yard), coal industry needs to address oppositions not only on coal dust from train, but also on potential global climate impact. So even though many producers are hopeful of new export facilities eventually coming online, status-quo seems more likely the near-term outlook.

Ocean Freight Could Bite

Currently, ocean freight rates are at historical low because of vessel overcapacity. This has allowed US coal to be more competitive in international markets. But freight rate will not stay this low for too long. By then, the U.S. coal will have a difficult time competing with producers in Indonesia, Australia and Russia that are closer to the Asian key markets.

According to WSJ, while shipping coal from a U.S. mine to a customer in Asia adds $50 to the per-ton price, Australian producers can get coal from their mines to China and other Asian markets for half that.

Near Term Outlook 

China will continue to import coal from U.S. mines via Canadian coal terminals operated by companies such as Westshore Terminals Ltd. Westshore has raised its annual handling capacity to 33 million tonnes this year from 24 million tons in 2007 and are sending as much as 3.76 million tons a month abroad.

In the U.S., CONSOL Energy (NYSE: CNX) has some export advantage over peers since the company owns the Baltimore Marine terminal.  Bloomberg noted this is the only terminal wholly owned by a coal company in the U.S.  Other coal companies will have to pay fees to CONSOL to use the terminal with 15 million tons a year capacity.

Rail companies like CSX (NYSE: CSX), Norfolk Southern (NYSE: NSC), and top U.S. coal companies Peabody Energy (NYSE: BTU), Alpha Natural Resources (NYSE:ANR), and Arch Coal Inc. (NYSE: ACI) also jointly or individually own a few terminals on the East Coast and Gulf of Mexico.

Houston-based terminal operator Kinder Morgan (NYSE: KMP) last year said it plans to invest more than $450 million in coal terminal expansion projects. That already caused air quality concerns at Houston Ship Channel among local environmentalists. This suggests U.S. Gulf Coast states may seem more accommodating to oil and gas in the past, the coal dust air pollution problem means new coal facilities may still have a tougher time getting approved.

A Million Dollar Mile Awaits

The recent trend suggests U.S. regulators are increasingly taking into consideration the global-warming impacts of coal pollution problem in Asia as they decide on new coal terminal proposals. But I see the logic more like this: The law of supply and demand means Asia will get its coal (oil and gas) from somewhere else, if not from the U.S., to feed its energy hunger.  Until Asian developing nations get their environmental standards and regulations together, the global warming impact will go on even if U.S. totally bans all energy export to Asia.

 

Bloomberg said CONSOL employees call a long coal train a "million dollar mile," which is a reference to the cargo's total value at current prices.  For now, until the coal industry can properly address the coal dust air pollution issue and get approvals for new export capacity, the line for the “Million Dollar Mile” could get even longer.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities , ETFs , US Markets

Referenced Stocks: FILL , GNAT , IPW , IXC , KOL

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