By Gaurav Sharma
April 15, 2019 - President Donald Trump's backing of the country's coal industry is unquestionable. He vowed to "save" America's coal miners whilst on the presidential campaign trail and has hardly toned down his stance since entering the White House.
In July 2017, the President famously – or infamously depending on your point of view – announced his intention to withdraw from the Paris Climate Agreement, which was signed by 195 countries in November 2015.
Some 12 months later came Trump's "affordable clean energy" rule that transferred pollution-control laws to individual states, making project approvals for coal plants easier and emission standard compliance more lax in theory. He almost single-handedly tried to roll back rules on climate change adopted during the Obama administration to fulfill pledges to voters in coal mining states like West Virginia, Montana and Wyoming.
Yet for all of that, more coal-fired power plants have shut stateside in Trump's first two years than were decommissioned in the entirety of Barack Obama's first term in office, according to a collation of U.S. Energy Information Administration (EIA) and Reuters data.
Readings point to 23,400 MW of U.S. coal-fired generation being taken out of the grid in 2017-18, versus 14,900 MW in 2009-12. In fact, the EIA notes that the number of coal plants has continued to decline every year since U.S. coal capacity peaked at just over 317,400 MW in 2011, and the agency does not forecast a reversal.
As coal-fired plants shutter and domestic demand falters; exports – while rising – face a global lower carbon emissions challenge. Little wonder it is then that Moody's reckons coal producers in the Powder River Basin (PRB), the U.S.' largest coal producing region, will continue to face weak business prospects in 2019.
What's more, the rating agency says there is no "clear solution in sight" for the predicament of producers in the mammoth coal production basin that covers eastern Wyoming and Montana.
"The PRB is the weakest coal basin today. Deteriorating business conditions in the basin have led to production cuts by some major producers, financial stress for producers with weaker credit quality and a very difficult market for lower-heat coals," warns Benjamin Nelson, Senior Credit Officer at Moody's.
Despite Trump's rhetoric, the industry is in a long-term secular decline driven by a combination of low-cost natural gas, and a trend toward more renewable energy. All these factors have made the PRB's low-sulfur, low-heat coal less competitive as U.S. utilities continue to retire coal-fired power plants, adds Nelson.
Export opportunities, offering operational short to medium term redemption for American coal producers, also appear constricted for the PRB players compared to other basins due to logistical difficulties, including public opposition to exporting coal from the U.S. west coast states.
Oregon, California and Washington State have all curbed coal exports and cargo handling, leaving much of the PRB coal routing, where possible, via the port of Vancouver in British Columbia, Canada. Quite the contrary, coal producers in Appalachia and Illinois Basin have been more successful at exporting coal via the east coast.
Offering a case in point are the short-term prospects and business trajectories of Warrior Met Coal (NYSE: HCC), which supplies coal from its two mines in Alabama to European blast furnace sites; and Cloud Peak Energy (NYSE:CLD) which is firmly rooted in the PRB mining.
How both are doing commercially could not be more different. While the former is managing to offer dividends to shareholders, with a 36% uptick in its share price on an annualized basis (from April 16, 2018), the latter has de-listed from the NYSE to trade on the OTC Pink market following a 98% decline in its share price and bankruptcy fears.
That's the sort of financial trouble Cloud Peak Energy's PRB peers Peabody Energy and Arch Coal are only too familiar with. Yet, Moody's does not expect consolidation among PRB producers in the near term, which suggests the region's economics will not improve on a sustainable basis. And while major producers in the basin, including Peabody Energy and Arch Coal, are throttling back output, the industry remains fragmented and some smaller producers are still increasing production.
Trump beat Hillary Clinton in Wyoming (with 67% of the vote share), Montana (56.2%) and West Virginia (68.50%). In fact, in West Virginia, his victory margin of 42.2% over Clinton is the largest of any presidential candidate from either party in the state's history, besting Abraham Lincoln's 36.4% margin of victory in 1864.
Most voters in these three United States voted on the President's promise of saving their coal industry but the macro scenarios remain challenging, especially for Montana and Wyoming mines. Perhaps, even the President realizes that promising is easy; but changing the market dynamic clearly isn't.