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Global Coal Use Falling Fast, Arch Coal Could Face Bankruptcy

Energy

Listen to congressional Republicans and you would think that President Obama’s regulations are behind the nosedive the coal industry has taken this year. Alpha Natural Resources filed for Chapter 11 this summer, Arch Coal may follow next. Its stock, which traded as high as $3,600 in 2011 dipped to $1.50 this week.

Elk Creek Mine, located near Somerset in Gunnison County, Colorado. Photo credit: Pam Morris / Flickr

There’s no question that the president’s Clean Power Plan and his other air pollution regulations cloud the future of the industry. But coal’s bleak present has much more to do with other factors; chief among them the low price of natural gas and bad business decisions that the country’s biggest coal companies made in recent years. “These are undoubtedly difficult, if not unprecedented, times for the coal sector,” Glenn Kellow, CEO of Peabody, the world’s largest coal company, reportedly said on the company’s recent earnings call.

Both Arch Coal and Peabody Energy paid billions of dollars to acquire metallurgical coal mines when prices of this type of coal, which is used to make steel and other metals, were soaring. The price has since collapsed, leaving the companies swamped in debt and their stock prices a small fraction of what they used to be. In Arch’s case, it spent $3.4 billion in 2011 to buy International Coal Group, Inc., acquiring 13 mines in the eastern U.S. At the time, the only company more invested in metallurgical coal was Alpha National Resources, (remember that name), which was buying Massie Energy for $7.1 billion. That same year, Peabody shelled out $5.2 billion for metallurgical coal mines in Australia.

The companies borrowed to buy these metallurgical coal mines, with the expectation that Asia, especially China, would gobble up all the metallurgical coal they could produce. What they didn’t count on was the price of metallurgical coal spiraling downward due in part to increased supplies of metallurgical coal from other countries and slower growth in China. Now U.S. metallurgical coal sells for less than half what it did in 2011.

Arch’s debt comes due next year. Scrambling to avoid bankruptcy, Arch tried to get creditors to renegotiate its debt, but the effort collapsed at the end of last month. Peabody has until 2018 and yet its stock has fallen from more than $1,000 in 2011 to less than $13 this fall.

The West is largely a bystander to this high drama, except that the companies that produce the most coal in the West are caught in the middle of it. Profitable mines owned by these companies in Wyoming’s Powder River Basin likely still will operate under whatever slimmed-down companies emerge from bankruptcy or under new ownership. But underground mines, where it costs more to extract the coal, may be less lucky. Peabody’s Twentymile mine in northwestern Colorado reportedly already has experienced significant reductions in production.

Mines in the West are not immune from the other main factor vexing the coal industry: low natural gas prices. Coal’s share in electricity production dropped from 50 percent in 2005 to 39 percent in 2014 and natural gas overtook coal as the biggest electricity producer for two months this year. The Energy Information Agency expects an eight percent decrease in total coal consumption in 2015 compared to 2014, mainly driven by electric companies shifting to low-cost natural gas. Retirement of coal-fired power plants due to the Obama administration’s Mercury and Air Toxics Standards contributed, but to a lesser degree, according to the Energy Information Agency. “The big story here is gas and how cheap it is,” says Robert Godby, associate economics professor at the University of Wyoming who focuses on coal.

The drop in demand for coal by the U.S. electric power sector combined with reduced exports has resulted in surpluses and has pushed prices down.

Overtime, this trend will push out less profitable operations. Bowie Resource Partners earlier this fall announced it was scaling back its workforce and evaluating the market for the coal from a mine near Paonia, Colorado. This will only get worse as the Obama administration’s Clean Power Plan kicks in. The U.S. Environmental Protection Agency projects its first-ever regulation of greenhouse gases for existing power plants will drive coal’s share of electricity production down to 27 percent by 2030.

But coal’s prospects will deteriorate much more if world leaders make the deeper cuts in greenhouse gases that scientists say will be needed in coming decades to avoid the most catastrophic consequences of climate change. “The elephant in the room is climate change,” says Godby. “The Clean Power Plan is just the beginning. It doesn’t get close to what you need.”

Exports won’t likely take the place of domestic demand, Godby cautions. China has committed to leveling off and then reducing its emissions and is considering moving its coal-fired electricity generation to the interior of its country to limit air pollution in its coastal cities. It could locate its new power plants near its own stores of coal. Transporting even Powder River Basin coal that far likely would be cost prohibitive. India also has sources of coal closer to home.

Communities like Gillette, Wyoming and Craig, Colorado, have grown up around coal mines and their decline could have dramatic impacts on local economies.

“The projections are quite grim,” says Adele Morris, who focuses on the economics of climate change at the Brookings Institution think tank. “Any kind of serious climate policy dramatically reduces coal.”

Morris is gathering experts to brainstorm policies that might alleviate the economic pain for coal miners and their communities. “It behooves us not to solve our environmental problems in a way that kicks people when they’re down,” Morris added.

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The last time San Francisco did not record a drop of rain in February was in 1864 as the Civil War raged.

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On Thursday, the U.S. Drought Monitor said nearly 60 percent of the state was abnormally dry, up from 46 percent just last week, according to The Mercury News in San Jose.

The dry winter has included areas that have seen devastating fires recently, including Sonoma, Napa, Lake and Mendocino counties. If the dry conditions continue, those areas will once again have dangerously high fire conditions, according to The Mercury News.

"Given what we've seen so far this year and the forecast for the next few weeks, I do think it's pretty likely we'll end up in some degree of drought by this summer," said Swain, as The Mercury News reported.

Another alarming sign of an impending drought is the decreased snowpack in the Sierra Nevada Mountain range. The National Weather Service posted to Twitter a side-by-side comparison of snowpack from February 2019 and from this year, illustrating the puny snowpack this year. The snow accumulated in the Sierra Nevadas provides water to roughly 30 percent of the state, according to NBC Los Angeles.

Right now, the snowpack is at 53 percent of its normal volume after two warm and dry months to start the year. It is a remarkable decline, considering that the snowpack started 2020 at 90 percent of its historical average, as The Guardian reported.

"Those numbers are going to continue to go down," said Swain. "I would guess that the 1 March number is going to be less than 50 percent."

The National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center forecast that the drier-than-average conditions may last through April.

NOAA said Northern California will continue deeper into drought through the end of April, citing that the "persistent high pressure over the North Pacific Ocean is expected to continue, diverting storm systems to the north and south and away from California and parts of the Southwest," as The Weather Channel reported.

As the climate crisis escalates and the world continues to heat up, California should expect to see water drawn out of its ecosystem, making the state warmer and drier. Increased heat will lead to further loss of snow, both as less falls and as more of it melts quickly, according to The Guardian.

"We aren't going to necessarily see less rain, it's just that that rain goes less far. That's a future where the flood risk extends, with bigger wetter storms in a warming world," said Swain, as The Guardian reported.

The Guardian noted that while California's reservoirs are currently near capacity, the more immediate impact of the warm, dry winter will be how it raises the fire danger as trees and grasslands dry out.

"The plants and the forests don't benefit from the water storage reservoirs," said Swain, as The Mercury News reported. "If conditions remain very dry heading into summer, the landscape and vegetation is definitely going to feel it this year. From a wildfire perspective, the dry years do tend to be the bad fire years, especially in Northern California."

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