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The Incredible Shrinking U.S. Coal Industry

Energy

Greenpeace

By Kelly Mitchell

It’s been a big month for news on the state of the U.S. coal industry—from announcements that China is significantly curbing coal use, to the long-awaited unveiling of the Obama Administration’s carbon standards for new coal-fired power plants.

Despite Peabody’s claims that “We have trillions of tons of coal resources in the world. You can expect the world to use them all,” a very different reality is shaping up. ”King Coal” is being reduced to pawn. The open secret is that it has very little to do with new U.S. Environmental Protection Agency (EPA) rules.

The beginning of the end.

Peabody (BTU) and Arch (ACI) stocks have lost more than 75 percent of their value since their 2011 peak, despite overall economic recovery. Source: Google Finance

It’s old news that the coal industry is in trouble. Peabody (BTU) and Arch (ACI), the largest U.S. coal companies, have lost more than 75 percent of their peak value since 2011, as coal struggles to compete with renewable energy and gas. One-hundred-seventy new coal plants representing $450 billion in capital investment have been canceled. Few utility companies are taking a gamble on new coal generation; those who have are in financial trouble. Meanwhile, community activism has worked in tandem with shifting economics to secure the retirement of dozens of existing coal plants. Current and pending federal health and climate rules will only accelerate this trend.

While all eyes were on EPA, a surprising indicator of the severity of coal’s decline emerged from the relatively obscure federal coal leasing program. The Department of Interior (DOI), through its Bureau of Land Management (BLM), owns and manages one of the world’s largest coal reserves in the world in the Powder River Basin of Wyoming and Montana. Since the start of the Obama Administration, DOI has leased over 2 billion tons of federal coal to companies like Peabody, at rates of around $1 per ton. Literally cheaper than dirt.

Not surprisingly, this leasing program has come under intense public scrutiny from environmentalists, taxpayer advocates, U.S. Senators and federal investigators over claims that it is shortchanging taxpayers, ignoring the industry’s desire to export coal overseas, and fueling climate change.

However, recently, BLM is facing a new set of challenges. For the second time in less than a month, federal coal auctions in the Powder River Basin have resulted in no coal sales.

On Aug. 21, Cloud Peak Energy declined to bid for the Maysdorf II coal tract, citing “current market conditions and the uncertainty caused by the current political and regulatory environment towards coal and coal-powered generation.” This marked the first time in Wyoming’s history that a coal lease sale failed to attract a single bidder.

A few weeks later, on Sept. 18, Kiewit mining company placed a 21 cent per ton bid for the Hay Creek II tract—the lowest Wyoming bid in 15 years. BLM rejected the offer. As Ben Jervey at DeSmogBlog put it, “Hey, at least we can’t accuse the BLM of literally giving away coal on public lands.”

Twice, the federal government offered up huge tracts of coal, for what would have been giveaway prices, and the coal industry effectively passed. Coal companies have the whole leasing system rigged in their favor, and it’s still not worth the risk!

But maybe it’s not surprising. The U.S. is moving away from coal in favor of cleaner energy, and the coal mining industry is wary of dumping big money into mines oriented to meet domestic demand. For all the hand-wringing and outrage over EPAs carbon standards for new coal plants, the truth is coal has been behind the curve for some time.

Which brings us to China.

With declining demand at home, the U.S. coal industry has increasingly looked to the export market as its saving grace. Cloud Peak, the company that declined the Maysdorf II tract designed to feed its domestic coal plant serving Cordero Rojo mine, is working to rapidly expand what it calls an “export-focused mine complex” in Montana.

Unfortunately—for the poor coal companies who have poisoned our air and water for generations—it appears that opportunity has passed.

Global coal prices surged in mid 2009, fueled by a large increase in demand for imported coal from China. China’s appetite made coal sales to Asia a lucrative business proposal for companies who could get their rocks on ships, and coal export terminal proposals popped up soon after in Oregon and Washington States. The domestic market was slowing—but, hey, coal companies had a fire exit.

However, it now appears that market has peaked and is on the decline. China’s coal appetite is cooling, and with it the entire Pacific seaborne market. Analysts at Bernstein were blunter:

Globally, Chinese demand growth has been the primary driver or the backstop behind every new investment in coal mining over the last decade. The "global coal market" ended with the collapse in price in 2012.

Ross Macfarlane at Climate Solutions recently posted a brilliant digest of new analysis from Wall St. firms such as Goldman Sachs, Bernstein and Citibank—all pointing to a bleak future for the global coal trade and the U.S. coal industry in particular.

U.S. coal companies are already feeling the impacts of this downturn. Sightline Institute’s recent analysis of Cloud Peak’s second quarter earnings statement revealed that the company made significantly more money betting against coal than it did on actual foreign sales.

And this month, the Chinese government announced a far-reaching air pollution response plan that will lock in additional, long-term declines in Chinese coal consumption—especially in major importing regions.

The plan sets ambitious timelines for reducing fine particulate pollution in Beijing and other key heavily-populated cities. It calls for three main economic areas—Beijing-Tianjin-Hebei, Yangtze River Delta and Pearl River Delta—to peak and decline their coal consumption by 2017. It also bans the approval of new conventional coal-fired power plants in these key regions.

The ban on new coal-fired power plants covers China’s most important coal importing regions; the Pearl River Delta and Yangtze River Delta, responsible for more than 50 percent of thermal coal imports. It’s hard to read the crystal ball on the long term risks and opportunities in the Pacific coal market, but if U.S. coal companies are hoping for a dramatic surge in new coal demand in Eastern China to restore profitability, they might not want to hold their breath.

The New York Times, Associated Press and Wall Street Journal have reported on these developments with little optimism for the U.S. coal industry, evidenced by headlines like “Coal’s future darkens around the world.”

Cracks in the carbon bubble.

This mix of declining domestic demand and softening coal markets makes the U.S. coal industry the potential bellwether of the coming cracks in the carbon bubble. Peabody’s billions of tons of reserves were scooped up in the promise of growing markets and bigger margins. Now, one word describes the outlook for coal’s economic relevance: smaller.

Analyses from Carbon Tracker have warned that money invested in expanding fossil fuel reserves represent wasted capital as it becomes increasingly clear that most of the world’s fossil fuels are unburnable. Warnings that most fossil fuel reserves cannot be burned have also come from global institutions like the International Energy Agency and, most recently, the Intergovernmental Panel on Climate Change report.

Coal reserves are at particular risk of becoming stranded assets for several reasons. As the most polluting fossil fuel, any serious action to reduce carbon pollution must dramatically reduce coal consumption—EPA's new and pending carbon rules are a clear sign of what’s to come. Further, coal-fired power plants are major sources of deadly air pollution, so efforts to improve air quality are pushing the world’s top coal consumers—China and the U.S.—to rein in coal now.

The U.S. coal industry owns billions of tons of reserves in a developed country that’s steadily retiring coal fired power plants, and their only escape route is a global market that has likely already peaked. Peabody and Arch, the two leading U.S. coal companies, are badly positioned to deal with today’s global markets. Their value is depressed, debt levels are too high and their future sales potential is impaired.

Do not be surprised if the value of these companies, already at record lows, decreases further.

Reporting on major shifts in the domestic and global coal market, the Wall Street Journal recently concluded, “Investors in coal might well feel paranoid. But remember: it isn’t paranoia if the world really is out to get you.”

Down, but not out. 

With so much bad news for coal, it might be time to revisit the classic activist narrative of David vs. the Coal Industry Goliath. It may be some time before we see the “end of coal” in a literal sense, but we are approaching a future with fewer, smaller, more volatile coal companies competing for a dwindling share of the electricity market. Coal CEOs should fear irrelevance before death.

Greenpeace International Director Kumi Naidoo stands with anti-coal protestors. Photo credit: Stephen Carerra /Greenpeace

But there’s another factor at play—the coal industry has historically punched above its weight, politically. You don’t have to search far to find examples of politicians and regulators green-lighting environmental and financial boondoggles peddled by the U.S. coal industry.

Deutsche Bank may call coal a “dead man walking.” But the industry is still very alive in certain corners of American politics.

DOI continues to hold lease sales, with billions of tons of coal in the leasing pipeline. Obama’s Army Corps of Engineers refuses to look at the full impacts of coal export proposals. Local governments are considering the risks of increased coal dust and diesel pollution because of the promise of economic development, even though that may never come. Members of Congress are introducing countless bills to roll back environmental protections.

Fortunately, these last ditch efforts to secure political support for risky coal projects are being met by a powerful and growing grassroots movement.

China’s ambitious coal reduction plan is a response to growing public demands for clean air. Research shows that every year thousands of Chinese citizens are dying from coal pollution. Those revelations have sowed anger in a Chinese culture that traditionally holds great value on long life, and the ability to enjoy active old age with grandchildren and friends.

Here in the U.S., the heads of more than 20 organizations representing millions of people have called on Interior Secretary Jewell to establish a moratorium on new federal coal leasing. The two failed auctions in the midst of so much controversy should be a wake-up call and opportunity for Jewell to put the brakes on this carbon giveaway. The market is declaring a moratorium; the Secretary must use her policy levers to reshape the program.

And thousands of people are turning out to public hearings, rallies and workshops in opposition to new coal export terminals on the West Coast, joining their voices with small businesses, ranchers, religious leaders and elected officials at all levels of government.

People on both sides of the Pacific are drawing a line against coal, and they will win. Because, in the words of Seattle Times columnist Lance Dickie, “The only return on investment with coal, coal trains and coal terminals is carbon dioxide and ocean acidification.”

The question remains, of course, if we can end our use of coal in time to avoid catastrophic climate change… or if we can draw strength from the victories of the last several years to defeat the Goliaths in the oil and gas industry. But, with a long and difficult fight ahead, we owe it to ourselves to pause and reflect on the successes at hand.

Cheers, to the beginning of the end of coal.

Visit EcoWatch’s COAL page for more related news on this topic.

——–

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Ola Elvestrun, Norway's environment minister, announced Thursday that it is freezing its contributions to the Amazon Fund, and will no longer be transferring €300 million ($33.2 million) to Brazil. In a press release, the Norwegian embassy in Brazil stated:

Given the present circumstances, Norway does not have either the legal or the technical basis for making its annual contribution to the Amazon Fund.

Brazilian President Jair Bolsonaro reacted with sarcasm to Norway's decision, which had been widely expected. After an official event, he commented: "Isn't Norway the country that kills whales at the North Pole? Doesn't it also produce oil? It has no basis for telling us what to do. It should give the money to Angela Merkel [the German Chancellor] to reforest Germany."

According to its website, the Amazon Fund is a "REDD+ mechanism created to raise donations for non-reimbursable investments in efforts to prevent, monitor and combat deforestation, as well as to promote the preservation and sustainable use in the Brazilian Amazon." The bulk of funding comes from Norway and Germany.

The annual transfer of funds from developed world donors to the Amazon Fund depends on a report from the Fund's technical committee. This committee meets after the National Institute of Space Research, which gathers official Amazon deforestation data, publishes its annual report with the definitive figures for deforestation in the previous year.

But this year the Amazon Fund's technical committee, along with its steering committee, COFA, were abolished by the Bolsonaro government on 11 April as part of a sweeping move to dissolve some 600 bodies, most of which had NGO involvement. The Bolsonaro government views NGO work in Brazil as a conspiracy to undermine Brazil's sovereignty.

The Brazilian government then demanded far-reaching changes in the way the fund is managed, as documented in a previous article. As a result, the Amazon Fund's technical committee has been unable to meet; Norway says it therefore cannot continue making donations without a favorable report from the committee.

Archer Daniels Midland soy silos in Mato Grosso along the BR-163 highway, where Amazon rainforest has largely been replaced by soy destined for the EU, UK, China and other international markets.

Thaís Borges.

An Uncertain Future

The Amazon Fund was announced during the 2007 United Nations Climate Change Conference in Bali, during a period when environmentalists were alarmed at the rocketing rate of deforestation in the Brazilian Amazon. It was created as a way of encouraging Brazil to continue bringing down the rate of forest conversion to pastures and croplands.

Government agencies, such as IBAMA, Brazil's environmental agency, and NGOs shared Amazon Fund donations. IBAMA used the money primarily to enforce deforestation laws, while the NGOs oversaw projects to support sustainable communities and livelihoods in the Amazon.

There has been some controversy as to whether the Fund has actually achieved its goals: in the three years before the deal, the rate of deforestation fell dramatically but, after money from the Fund started pouring into the Amazon, the rate remained fairly stationary until 2014, when it began to rise once again. But, in general, the international donors have been pleased with the Fund's performance, and until the Bolsonaro government came to office, the program was expected to continue indefinitely.

Norway has been the main donor (94 percent) to the Amazon Fund, followed by Germany (5 percent), and Brazil's state-owned oil company, Petrobrás (1 percent). Over the past 11 years, the Norwegians have made, by far, the biggest contribution: R$3.2 billion ($855 million) out of the total of R$3.4 billion ($903 million).

Up till now the Fund has approved 103 projects, with the dispersal of R$1.8 billion ($478 million). These projects will not be affected by Norway's funding freeze because the donors have already provided the funding and the Brazilian Development Bank is contractually obliged to disburse the money until the end of the projects. But there are another 54 projects, currently being analyzed, whose future is far less secure.

One of the projects left stranded by the dissolution of the Fund's committees is Projeto Frutificar, which should be a three-year project, with a budget of R$29 million ($7.3 million), for the production of açai and cacao by 1,000 small-scale farmers in the states of Amapá and Pará. The project was drawn up by the Brazilian NGO IPAM (Institute of Environmental research in Amazonia).

Paulo Moutinho, an IPAM researcher, told Globo newspaper: "Our program was ready to go when the [Brazilian] government asked for changes in the Fund. It's now stuck in the BNDES. Without funding from Norway, we don't know what will happen to it."

Norway is not the only European nation to be reconsidering the way it funds environmental projects in Brazil. Germany has many environmental projects in the Latin American country, apart from its small contribution to the Amazon Fund, and is deeply concerned about the way the rate of deforestation has been soaring this year.

The German environment ministry told Mongabay that its minister, Svenja Schulze, had decided to put financial support for forest and biodiversity projects in Brazil on hold, with €35 million ($39 million) for various projects now frozen.

The ministry explained why: "The Brazilian government's policy in the Amazon raises doubts whether a consistent reduction in deforestation rates is still being pursued. Only when clarity is restored, can project collaboration be continued."

Bauxite mines in Paragominas, Brazil. The Bolsonaro administration is urging new laws that would allow large-scale mining within Brazil's indigenous reserves.

Hydro / Halvor Molland / Flickr

Alternative Amazon Funding

Although there will certainly be disruption in the short-term as a result of the paralysis in the Amazon Fund, the governors of Brazil's Amazon states, which rely on international funding for their environmental projects, are already scrambling to create alternative channels.

In a press release issued yesterday Helder Barbalho, the governor of Pará, the state with the highest number of projects financed by the Fund, said that he will do all he can to maintain and increase his state partnership with Norway.

Barbalho had announced earlier that his state would be receiving €12.5 million ($11.1 million) to run deforestation monitoring centers in five regions of Pará. Barbalho said: "The state governments' monitoring systems are recording a high level of deforestation in Pará, as in the other Amazon states. The money will be made available to those who want to help [the Pará government reduce deforestation] without this being seen as international intervention."

Amazonas state has funding partnerships with Germany and is negotiating deals with France. "I am talking with countries, mainly European, that are interested in investing in projects in the Amazon," said Amazonas governor Wilson Miranda Lima. "It is important to look at Amazônia, not only from the point of view of conservation, but also — and this is even more important — from the point of view of its citizens. It's impossible to preserve Amazônia if its inhabitants are poor."

Signing of the EU-Mercusor Latin American trading agreement earlier this year. The pact still needs to be ratified.

Council of Hemispheric Affairs

Looming International Difficulties

The Bolsonaro government's perceived reluctance to take effective measures to curb deforestation may in the longer-term lead to a far more serious problem than the paralysis of the Amazon Fund.

In June, the European Union and Mercosur, the South American trade bloc, reached an agreement to create the largest trading bloc in the world. If all goes ahead as planned, the pact would account for a quarter of the world's economy, involving 780 million people, and remove import tariffs on 90 percent of the goods traded between the two blocs. The Brazilian government has predicted that the deal will lead to an increase of almost $100 billion in Brazilian exports, particularly agricultural products, by 2035.

But the huge surge this year in Amazon deforestation is leading some European countries to think twice about ratifying the deal. In an interview with Mongabay, the German environment ministry made it very clear that Germany is very worried about events in the Amazon: "We are deeply concerned given the pace of destruction in Brazil … The Amazon Forest is vital for the atmospheric circulation and considered as one of the tipping points of the climate system."

The ministry stated that, for the trade deal to go ahead, Brazil must carry out its commitment under the Paris Climate agreement to reduce its greenhouse gas emissions by 43 percent below the 2005 level by 2030. The German environment ministry said: If the trade deal is to go ahead, "It is necessary that Brazil is effectively implementing its climate change objectives adopted under the [Paris] Agreement. It is precisely this commitment that is expressly confirmed in the text of the EU-Mercosur Free Trade Agreement."

Blairo Maggi, Brazil agriculture minister under the Temer administration, and a major shareholder in Amaggi, the largest Brazilian-owned commodities trading company, has said very little in public since Bolsonaro came to power; he's been "in a voluntary retreat," as he puts it. But Maggi is so concerned about the damage Bolsonaro's off the cuff remarks and policies are doing to international relationships he decided to speak out earlier this week.

Former Brazil Agriculture Minister Blairo Maggi, who has broken a self-imposed silence to criticize the Bolsonaro government, saying that its rhetoric and policies could threaten Brazil's international commodities trade.

Senado Federal / Visualhunt / CC BY

Maggi, a ruralista who strongly supports agribusiness, told the newspaper, Valor Econômico, that, even if the European Union doesn't get to the point of tearing up a deal that has taken 20 years to negotiate, there could be long delays. "These environmental confusions could create a situation in which the EU says that Brazil isn't sticking to the rules." Maggi speculated. "France doesn't want the deal and perhaps it is taking advantage of the situation to tear it up. Or the deal could take much longer to ratify — three, five years."

Such a delay could have severe repercussions for Brazil's struggling economy which relies heavily on its commodities trade with the EU. Analysists say that Bolsonaro's fears over such an outcome could be one reason for his recently announced October meeting with Chinese President Xi Jinping, another key trading partner.

Maggi is worried about another, even more alarming, potential consequence of Bolsonaro's failure to stem illegal deforestation — Brazil could be hit by a boycott by its foreign customers. "I don't buy this idea that the world needs Brazil … We are only a player and, worse still, replaceable." Maggi warns, "As an exporter, I'm telling you: things are getting very difficult. Brazil has been saying for years that it is possible to produce and preserve, but with this [Bolsonaro administration] rhetoric, we are going back to square one … We could find markets closed to us."

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