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West Virginia: Coal At The Crossroads

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An Oct. 17 court ruling was just the latest boost given coal producers in their long, slow battle against regulators and economic change.

A U.S. District Court judge ruled the U.S. Environmental Protection Agency had failed to assess the effect on coal mining jobs caused by the agency's tightened power plant emissions restrictions issued in 2011 under the Clean Air Act. The judge gave the EPA two weeks to produce data reviewing the matter. There has been no word on whether the agency will appeal the decision.

The ruling was a glimmer of good news in coal mining states like Wyoming, Kentucky and Pennsylvania, all hard hit by mining job losses. But in no state is the population more dependent upon coal mining jobs than in West Virginia.

Coal production in the state has been halved in less than a decade. Coal industry employment has fallen 35% since 2011. The drop is due to a convergence of factors: the EPA rules, competition from cheap natural gas, and the weakening of international demand caused primarily by China's voluntary economic slowdown.

Yet despite all that, coal mining stocks have posted the largest gain among industry groups over the past eight weeks. And not by a small margin. IBD's Energy-Coal group rose 26% from the beginning of September through Friday. The nearest competing industry was dairy products, which clocked a 20% increase.

IBD'S TAKE:Research shows as much of 50% of a leading stock's performance owes to the strength of its industry group and sector . The No. 2 ranking for the Energy-Coal group on Friday shows stocks in the group outperforming all but one of the 197 industry groups tracked by IBD .

Part of that gain is due to Arch Coal's ( ARCH ) Oct. 6 return from bankruptcy proceedings that swept away $4.7 billion in debt and left the company with more than $300 million in cash. Shares of SunCoke ( SXC ), a producer of metallurgical coal, are up 215% year-to-date, helped by strong third quarter results posted Oct. 20. The company is forecast to see a 46% earnings decline this year, followed by a 271% rebound in 2017. Pennsylvania-based CNX Coal ( CNXC ) is up 128% so far this year, and looking at a 141% bounce in earnings in 2017.

But those corporate gains have meant only minor improvements in places like West Virginia. And while politicians gain favor by promising a resurgence in coal, economic officials argue that diversifying the economy is the only path to a better future.

New Coal Vs. Old Coal

Undecided voter Ken Bone, attending the Oct. 9 presidential debate, asked, "What steps will your energy policy take to meet our energy needs while at the same time remaining environmentally friendly and minimizing job layoffs?"

Democratic candidate Hillary Clinton incorrectly said that the U.S. was energy independent, but correctly pointed out that the Middle East controls a lot of the pricing. She supports, among many other things, moving toward renewables to "create millions of new jobs."

Republican candidate Donald Trump, who has vowed to abolish the EPA, argued that the EPA and the White House were responsible for putting coal miners out of business.

Reversing EPA regulatory policies is a move popular in the coal industry and in mining communities. It would eliminate one of three sources of downward pressure on coal, says Dr. John Deskins, director of the Bureau of Business & Economic Research and associate professor at West Virginia University.

"You would still have two sources of downward pressure," he said. "It is unlikely that there is anything a U.S. president could do that would return coal to 2008 levels.

Coal production in the Mountain State has fallen 50% since 2008, Deskins said. This year's production is forecast at 74 million to 75 million short tons, down from a 1997 peak of more than 180 million tons.

Trump argued at the debate that, "coal will last for a thousand years in this country" and touted opportunities created by "clean coal."

Clean coal refers to processes that reduce or eliminate a range of emissions, primarily from electrical generation plants. The coal is largely the same stuff, but emissions are either captured and pumped underground ( Halliburton ( HAL ), General Electric ( GE ) and Schlumberger (SLB) are leaders in this "carbon capture and sequestration" market) or scrubbed from emissions before they leave the plant.

But the equipment and processes -- the measures demanded by the EPA's tighter restrictions -- are expensive, making coal relatively less attractive vs. natural gas. Still West Virginia Republican Sen. Shelley Moore Capito said coal remains competitive enough on both reliability and cost to afford it a long-term role as a baseload fuel.

"But we need to move forward … on working on carbon sequestration and carbon utilization because I think that will not just elongate the future of coal, but also clean it up," she said. "It will also produce other jobs around research and those kinds of things."

The Met Coal Factor

Wyoming's Powder River basin is the largest coal producing region in the U.S. The sub-bituminous coal there generally has a lower energy output than Appalachia's coal, but it also has a lower sulfur content. That allows generating plants to meet federal emissions requirements with less expense.

What Wyoming doesn't have is high-energy metallurgical coal, or "coking" coal that is used in steel making. A high percentage of this much-higher-price "met" coal is exported overseas. But Deskins said the export climate for coal has been weak since 2012 on stagnant economic growth in Europe and economic trouble in Russia and Brazil.

"Slow global economic growth means less demand for steel, and less demand for the metallurgical coal from southern West Virginia, an important part of making steel," Deskins said.

Terry Headley director of communications for the American Coal Council, said met coal could be set for a rebound, aided by production cuts in China as the country grapples with its oversupply. The larger seams of metallurgical coal are found in the southern part of West Virginia and historically accounted for 30% of the Mountain State's total coal production.

"I will say this, West Virginia will be mining met coal for the foreseeable future," Headley said.

Appalachia's steam coal is the fuel hardest hit by regulations, both at the mine and at the power plant. This month's court ruling may mean a brief reprieve from some of the regulatory burden, but the trend toward tighter emissions standards being urged by growing acceptance of both climate change and public health risks appears intact.

"The reality in West Virginia is that coal's best days are far behind it," said Sean O'Leary, a senior policy analyst at the West Virginia Center on Budget and Policy. "Any promises that doing one thing like replacing an environmental regulation or any sort of policy is going to turn around the coal industry is not a responsible thing to do or a fair thing to tell people."

At its peak in 2008, there were 22,034 coal miners employed in West Virginia vs. 18,330 in 2014 according to the latest data from the Energy Information Administration. In August, WVU economists said the southern counties of Boone, McDowell, Wyoming, Mingo, Logan, and Clay are in a deep depression due to job loss. Boone County alone lost 7,000 coal mining positions between 2014 and today, according to Headley.

"You can see the suffering everywhere," Sen. Capito said. "Not just coal jobs, but rail jobs, small businesses are closing up. People are leaving. Schools are losing students. It's a dire situation."

Opportunities In Old Mines, New Minds

There is no quick fix to bring the counties out of a depression. O'Leary said revamping West Virginia's economy will take a long time and require a lot of investment.

On her campaign website, candidate Clinton has promised voters in rural Appalachia that she will "invest in creating more good-paying jobs" in the region. In November, she laid out a $30 billion plan to help revitalize the region, including investing federal funds into infrastructure that will turn rail capacity that was used to ship coal to help economic development of the region.

Capito says the flaw with Clinton's plan is that it requires more job loss in the near term.

"Throwing money at the problem may make her and other folks feel better," Capito said, "but at the end of the day, what is it really going to result in?"

Neither Trump nor Clinton's campaigns responded to repeated requests for comments.

"The overall state economy moves so closely with energy. That's bad," Deskins said. "We want a strong energy sector but we desperately need to have industrial diversification, healthy manufacturing, healthy tourism."

Clinton outlined plans to use unappropriated funds from the Abandoned Mine Reclamation Fund to turn abandoned coal mines into real estate opportunities. In Alabama, Alphabet 's (GOOGL) Google is building a data center on the site of a former coal plant.

To get Google and other businesses to invest in Appalachia, Clinton said she would extend the New Markets Tax Credit program, a measure that supports investing in low income neighborhoods, to coal mining communities.

According to a 2015 study by Workforce West Virginia, Wal-Mart (WMT) was the top private employer in the state, with West Virginia United Health System, Charleston Area Medical Center, grocery chain Kroger (KR), and drugmaker Mylan (MYL) rounding out the top five.

Procter & Gamble (PG) is opening a $500 million manufacturing center near Martinsburg with 700 new jobs. The production of shampoo, deodorant and other personal products is expected to start in 2018.

The P&G announcement made for good headlines, but attracting jobs that can compete with $55,000 a year mining jobs will take more work, Deskins says.

"Big businesses aren't going to come here until they can find the workers they need, with the right education, right skills, and who are healthy and drug free," he said.

Clinton has stressed the need for investment in higher education and training people in Appalachia. West Virginia has the lowest percentage of college graduates out of all 50 states, according to a 2015 study by the U.S. Census Bureau. But attracting big businesses outside of energy is only part of the answer. Deskin said small entrepreneurs are key to changing the business climate in the state.

A recent study from the WV Center on Budget and Policy found that from 1995 to 2013, 87% of jobs created were from "home grown" startups or companies expanding in-state operations. Jobs that relocate from out of state create only 1% to 4% of new jobs yearly.

"Here at WVU we are doing more to teach entrepreneurialism. We have to get them starting to think early," Deskin said.

Related:

Coal Production Remained Subdued For Week Ended Oct. 15

How To Profit From Coal's Slow Demise

Copper Takes A Back Seat In The Ore Mining Industry Cycle

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


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

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