Thermal Coal as U.S. Export Industry

 |  Includes: BTUUQ, CLD, CNX, KOL, MEE, PKOL
by: James DeLong

[Part I of this series, The Precarious Crown of King Coal examined the attack on the use of coal in the U.S. by an alliance of environmentalists and the natural gas industry, and expressed concern that coal, domestically, is likely to be a flat or declining industry. This part suggests that coal might recoup its fortunes by becoming an export industry.]

Coal is divided into two basic categories: metallurgical or coking (used in steelmaking) and thermal or steam (used for heating and electrical generation). Metallurgical is the highest grade in terms of heating value, and sells for the highest price. It is not a high-volume product; according to EIA, the U.S. consumes about 15 million tons per year, and exports 30 to 40 million tons. It is not the subject of this article; while there is some substitution at the boundaries, metallurgical and thermal coal are basically different products with different markets.

Thermal coal production is a giant in comparison. World-wide consumption is over 7 billion tons, and U.S. consumption is around a billion tons per year. Coal is not widely exported from the U.S. During the past five years, thermal coal exports have usually been at the level of 22 million tons, which is only about 2/3 the level of imports. Coal is a commodity, heavy and expensive to ship, and available in many parts of the world. It is transported around the U.S., which has over the decades built up a huge rail infrastructure, but large-scale export has never been regarded as economical.

China is a large consumer and producer of thermal coal. It relies on coal for almost 70% of its electric power, and uses almost 3 billion tons per year. According to the World Coal Institute, China gets its coal from 18,557 mines, 95% of which are underground rather than surface, and many of them “small-scale and relatively unproductive.” The U.S., for comparison, has 1,458 coal mines, of which 60% are opencast.

In 2009, China moved from the status of net exporter of coal to net importer, with an intake of 126 (metric) tons, most of which came from Australia. The big international coal companies, Peabody (BTU) and BHP, for example, are focused on the potential for the growth of this market.

The question that is beginning to intrigue people is whether China’s demand could be met from the U.S., which, with 238 billion tons of proven reserves, has been called the Saudi Arabia of coal. The idea has intuitive appeal, especially because if U.S. demand flattens, then the existing infrastructure could be reprogrammed to serve Chinese demand.

During Peabody’s last earnings call, President Greg Boyce commented:

[W]e continue to make progress in developing a sustainable [Wyoming Powder River Basin] export off the west coast. . . .

[O]ur initiative is what can we do in volume . . . in order to move you know PRB coals into the Pacific rim, but as well as what can we do for our other coal products in the U.S., Illinois Basin and even Colorado into the International marketplace. . . . Suffice it to say there is a tremendous amount of work that’s taking place and our initiatives are focused on what can we put in place that will provide us a significant volume of capacity for PRB coals out of the west coast.

(Some commenters on Paul Kedrosky’s Infectious Greed blog are thinking the same way.)

On the basis of back-of-the-envelope arithmetic, the idea of exporting from the West Coast makes good sense.

A U.S. company could mine or buy coal in the PRB for about $10 per ton. The problem with PRB coal is that it has high moisture content and low Btus, but several innovative companies are working on precombustion upgrade technologies to increase the Btus and cut the weight, and it can reasonably be assumed that upgrading could be accomplished for another $10/ton.

The cost to rail ship from the PRB to the West Coast would add roughly $25 per ton (1000 miles at 2.5 cents ton/mile).

The final leg is across the Pacific, and, according to Stopford’s Maritime Economics, a Capesize ocean carrier (180,000 Dead Weight Tons) can be built and operated for about $25,000 per day. (So much excess shipping capacity exists that the cost is dropping, too.) Do more arithmetic on speed and the distance across the Pacific, and it appears that coal could be shipped from the West Coast of the U.S. to China for less than $10/ton.

Combining all these estimates, and it appears that high-quality, low-sulfur coal could be delivered from the PRB to China for a total cost of in the neighborhood of $60/ton. For comparison, 12,000 Btu coal could recently be bought at Newcastle, Australia, for $100 per (short) ton, from whence it still had to be shipped to China, so an exporter from the U.S. would have some headroom on all these costs.

Obviously, there are many uncertainties, such as the ability of port facilities to handle the traffic, but this first-cut arithmetic looks promising, and it looks even better for Alaska, where the mines are closer to the water. Private company Usibelli is working to develop a market in South America, and could easily shift to China as well. (The calculus would be different from the Eastern U.S., where the coal is higher quality in terms of Btus, but more expensive.)

A possible confirmation that this arithmetic is within the ballpark is the fact that last year Warren Buffett bought the BNSF railroad, which derives 30% of its revenue from coal shipments. Buffet does not buy declining industries, and is unlikely to have over-looked the environmentalist/ANGA (American Natural Gas Association) threat to the domestic U.S. industry. The BNSF operates between the Powder River Basin and the West Coast.

An export arrangement must make sense not only for the U.S. but for China, and one can see good reasons why it might. Chinese coal is high-sulfur, remote from the point of use, needs big investments in infrastructure to upgrade existing mines, puts a burden on China’s already-taxed railways, and costs 2,500 miners’ lives per year in accidents. Seaborne delivery from the U.S. could be an appealing proposition. Why should China invest in local infrastructure when it can buy the use of ours? (For the geography of Chinese production and use, see The World’s Greatest Coal Arbitrage: China’s Coal Import Behavior and Implications for the Global Coal Market.) China recently entered a long-term deal to import coal from Russia, which is probably not, in terms of transport difficulties, significantly closer than the PRB.

It is possible that the prospects in China far outweigh any decline in the U.S. A 33% increase in China’s coal consumption would be a billion tons, as much as the entire current U.S. market.

So perhaps the U.S. companies are not oblivious to the environmentalist/ANGA assault on their home market; they may just not regard it as important, compared with the overseas opportunities.

[NEXT: The Impact of the Climate Change Issue & Clean Coal]

Disclosure: None in public companies.