Coal's Ascendancy May Leave Ailing U.S. Miners in Pit

Agenda-Setting Financial Insight.
Dec. 28 2012 11:01 AM

Coal's Ascendancy May Leave Ailing U.S. Miners in Pit

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Coal’s ascendancy looks set to leave already ailing U.S. miners stuck in a pit

Photo by YURI CORTEZ/AFP/Getty Images

Coal’s ascendancy looks set to leave already ailing U.S. miners stuck in a pit. Within five years, the black rock is likely to replace oil as the world’s top energy source, according to the International Energy Agency. That should be good news for America’s miners, which are sitting on 28 percent of the planet’s coal. But they’re ill placed to do well from the boom.

America’s reserves equate to several hundred years of the nation’s current coal consumption. They’re also about 50 percent larger than Russia’s, which has the second-largest set of seams. Combined, the two countries burn about 1.2 billion tonnes of King Coal a year, equivalent to the 16 percent increase in global consumption the IEA expects by 2017.

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America’s coal industry is being left out of the party, however. It’s already hurting. Alpha Natural Resources and Arch Coal lost close to half their market value in 2012. The Obama administration’s tighter air control rules are only a small part of the problem. Natural gas remains cheap and is expected to further cut demand for coal in generating electricity by another 14 percent by 2017.

Worse, most U.S. mines are poorly placed to exploit demand outside its borders. Most, especially in the Appalachian states, are old and have already tapped the cheapest seams. Add in pricey rail transport to East Coast ports and exports only make money when coal is over $100 per tonne, according to Brean Murray Carret & Co. That puts them at least $5 out the money at current international prices. Costs for producers in Wyoming and Montana are lower, but these have poor access to ports.

Instead the spoils from rising global demand will go to those operating in Indonesia and Australia, the top two exporters. Flooding and weak global prices hurt Australian miners in 2012, knocking a third off the market value of top producer Whitehaven Coal. But the future looks brighter. Costs there and in Indonesia are lower. And China, the main growth market, is relatively close.

Miners down under should have a better 2013. But for America’s producers, a happy new year looks a tough call.

Read more at Reuters Breakingviews.

Chris Swann is a Reuters Breakingviews columnist, based in New York. He writes about hedge funds, commodities and asset management. He joined from Bloomberg News, where he covered global poverty issues and the International Monetary Fund.

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