US coal prepares for more upheaval

OREANDA-NEWS. July 29, 2015. The US coal industry, which is already in the midst of historic shifts, is preparing for even more upheaval in coming months.

The US Environmental Protection Agency (EPA) is expected soon to release its final iteration of the Clean Power Plan, which will significantly reduce CO2 emissions. And a handful of other new and proposed federal rules – ranging from the way certain types of mining are conducted to how to store byproducts of burning coal - will also shape industry production and demand.

The Energy Information Administration (EIA) has projected that the Clean Power Plan, as proposed last year, could result in another 90GW of coal-fired power capacity retiring from 2014 to 2040, nearly double EPA's estimate. Other rules, such as the US Department of Interior's proposed stream buffer zone revisions that were released last week, could also cut into generation or make mining more expensive.

Coal producers and users are challenging nearly all these new federal rules in the courts. And the Republican-led Congress has ramped up efforts to block the regulatory moves by EPA and other agencies. But the legislation is unlikely to survive vetoes by President Barack Obama. That would push back any meaningful change in the regulatory environment to more than a year from now.

Other domestic and global forces are already shaping the US coal industry. US coal-fired generation plunged by 19pc in April from a year earlier as many coal-fired units came offline to comply with EPA's mercury and air toxics standards and utilities took advantage of cheap natural gas. Gas-fired generation overtook coal electric power output for the first time ever that month, according to EIA data.

Paper trading of US coal contracts has also dropped significantly. The volume of Argus-confirmed, over-the-counter deals for physical delivery fell by 65pc in the first two quarters of this year from the 2014 period. And the volume of total financial and physical transactions collected by analysis firm Coaldesk declined by 43pc.

Thanks to booming shale production, EIA and other groups expect gas prices to remain low for at least the near future. That will continue to pressure coal and, along with reduced worldwide demand and high production costs, could push more coal mines and producers out of business.

Central Appalachian output has been hardest hit. But even Powder River basin production, the cheapest coal when priced at the mine, is expected to contract this year.

Walter Energy has been the latest producer to falter, filing for Chapter 11 bankruptcy protection last week. Alpha Natural Resources, which the New York Stock Exchange (NYSE) started taking steps to de-list last week, is also heard to be talking to creditors about restructuring. Arch Coal has been refinancing debt and recently offered a reverse stock split to try to avoid the same fate.

At the same time, smaller players are stepping in to buy some assets. Murray Energy bought a stake in Foresight Energy in April to become the biggest Illinois basin coal producer and the third-largest US coal producer. Blackhawk Mining and Westmoreland Coal have also been buying properties.