Various numbers are thrown around in regards to increasing Asian demand for coal. Recently, the World Resource Institute forecasted demand growth in India of an additional 250-350 million metric tons by 2020 as the number of coal-fired power plants is set to expand by an additional 520GW. McKinsey & Co forecasts Chinese demand to increase from 500 million to 1 billion additional metric tons of demand by 2030. Who can support this kind of demand growth? As it stands only Russia, Australia, Indonesia and the U.S. are capable of producing >100M tons for export.
The long-term future of some of the major U.S. coal producers hangs largely on the potential for exports. Certainly there will be domestic demand but for investors looking for the potential to buy into a growth story, exports have the ability to provide solid future returns. Two major caveats exist. Firstly, any investment would be mid to long-term in duration in an industry which has seen substantial volatility in recent years. Secondly, this would be a high-risk, high-reward investment as badly needed West Coast terminals may not be allowed to move forward - severely restricting any growth in U.S. exports to Asia.
Currently, exports impact the various Basins in the following ways:
- Appalachia: Exports of Met and Thermal coal through the East Coast and Gulf Coast terminals. Major customer base - Europe.
- ILB: Exports through the Gulf Coast terminals. Often blended with PRB coal to reduce sulfur to acceptable levels for Europe. Major customer base - Europe and Asia.
- PRB: Limited exports through Gulf Coast terminals and Western Canadian terminals. Major customer base - Asia with limited blending to Europe.
Below is a map, which I put together to outline some of the major trade routes (the days listed are to a central point in Asia). Not all terminals are mapped but what should jump out is the number of coal export terminals proposed for the Pacific Northwest and the resulting reduction of days-in-transit. Currently, U.S. nameplate capacity for the East Coast is at 108mm, with estimated expansions up to 115mm. Similarly, Gulf Coast terminal nameplate capacity stands at 75mm with expansion plans of up to 124mm. Either of these regions alone could handle the 2013 estimated coal exports of between 90-100 million short tons. What is really needed for U.S. coal to be competitive in the Asian markets is export terminals on the West Coast that would cut shipping days from 18-22, down to 10-12.
This is no secret to anyone with a cursory knowledge of the coal markets (or anyone living in the Pacific Northwest, for that matter). What is of importance, however, is the likelihood of one of these terminals coming on line and which coal producers would be most impacted. There are three major terminals which have submitted permits in the Pacific Northwest: Millennium Bulk (44Mtpa), Morrow Pacific (8Mtpa), and Gateway Pacific (45Mtpa). Ambre Energy, Kinder Morgan (KMI), Arch Coal (ACI), Cloud Peak (CLD), and Peabody (BTU) would all be significantly impacted as they either own the terminal projects, have contracts to ship through them when they come to fruition, or both.
So why aren't we barreling ahead with one of these projects? The problem doesn't lie in the economics - a Northwest terminal would create jobs and prove profitable to the coal producers, export terminals, and railroads; the issue lies in the communities through which the trains and terminals would operate.
An estimated 30+ trains would be passing through on a daily basis. With this comes a great deal of concern over noise and potential environmental impacts. This is a hotly debated topic and is sure to raise some strongly worded comments; however, my purpose is to evaluate the potential for new export terminals - not debate the merits or impacts of these projects.
As a bellwether, the Morrow Pacific project is the nearest-term project and will set the tone for all future projects. As a background, of all the proposed projects the Morrow Pacific project (also referred to as the Coyote Island Terminal) is the smallest and would have the least amount of impact on the communities of the Pacific Northwest. Coal from the PRB would be shipped to a warehouse in the Port of Morrow, from which it would be loaded in covered barges and shipped to the Port of St. Helens.
Ambre Energy is sticking to a timeline that calls for 3.5 million tons to be shipped in 2014 as part of their first phase, with a ramp up to the full 8 million tons thereafter. However, opponents of the export terminals have been adept at using bureaucratic procedure to their benefit to delay the project - costing Ambre valuable time and money. Most recently, Ambre's submission for a draft air permit (submitted in August, 2012) has been stuck in review by Oregon's Department of Environmental Quality. Initially, Ambre was told that no permit would be needed but, as it stands, construction cannot begin until the permit is issued. Once the draft is approved it will take an additional 30 days for public review.
This particular issue with the Morrow Pacific project follows a series of such delays. Prior to the air permit issue, Ambre voiced frustration over delays for a removal/fill permit from Oregon's Department of State Lands. These delays and the vigor with which opposition groups have challenged the project do not presage well for future projects and put any semblance of a realistic timeline in doubt.
For the patient investor, I believe this presents an opportunity. It's not without its risks and the payoff will not be immediate. One may ask - is this the best use of capital? That question depends largely on your personal investment goals and timeline. However, the opportunity exists to invest in companies which took a battering in 2012 and have begun to recover. I believe that they will continue to recover in 2013 and that any potential upside from exports through the Pacific Northwest would be a long-term boon. And this upside has the potential to be significant. If the Morrow Pacific project moves forward, followed by one of the larger projects, U.S. exports would increase 50% from 2013 forecasts. Either way, in five-seven years the U.S. coal industry will be different than it is today. In my opinion, exports through the Pacific Northwest will be a part of that future and the time to invest in it is now.