Coal’s Collapse

By Ross Macfarlane

This blog series offers stories from the arc of the broad efforts in our region to stop coal exports off the West Coast. While the fight still continues, we have been successful so far. There is no one coal export campaign story because all who were involved brings a unique perspective and played varying roles. For example, we honor the stories from the courageous leadership of the Lummi Nation and other tribal leaders who convinced the US Army Corps of Engineers to deny the permits for the largest proposed coal terminal at Cherry Point, WA almost a year ago. We plan to publish more stories in this series and welcome submissions from other groups and friends who are involved in this amazing campaign.

You can read the first installment, Halting the Runaway Coal Export Train here, that sets the stage for the start of  a multi-year effort to stopped what at the time seemed to be an unstoppable onslaught of proposed coal export terminal projects.  

China Begins to Turn From Coal

“What … tanked the US coal industry? One word… China.”
Rhodium Group, The Hidden Cause of America’s Coal Collapse, February 2016

Back at the start of the coal exports fight in the Northwest in 2010, China was the “500-pound gorilla” in the debate regarding the viability of coal exports as an economic development strategy for Northwest communities.  Coal company executives, terminal backers, and industry consultants had relied on straight-line forecasts of growing Chinese coal use and rising prices in their “pro formas” and investor presentations.  They also stressed the argument that “they’re just going to burn it anyway” to pressure communities and agencies to approve their proposals.  Industry used the same rosy forecasts to support export terminal projects that they  relied on to justify taking on billions of dollars in debt to support huge acquisitions and infrastructure investments, such as Peabody Energy’s purchase of the MacArthur Coal group in Australia in 2011.

These forecasts were mirrored in the conventional wisdom about coal exports, based on extensive reports showing that China was building hundreds of new coal plants every year.  As it turned out, these forecasts and the conventional wisdom proved to be wildly optimistic for the coal industry, and unnecessarily pessimistic for the global climate.

Some of the critical factors in China’s decisive turn from coal imports included:

• Cooling off of China’s torrid pace of growth;
• Efforts to restructure its economy away from basic industry toward services and consumer demand;
• Shifting growth from the coasts toward internal cities that were closer to domestic coal supplies;
• Investments in rail and road infrastructure that reduced China’s need to rely on imported coal to meet existing demand;
• Increased focus on energy efficiency and renewables as ways to meet China’s power needs; and
• Growing international media coverage and public concerns about the air pollution crisis affecting health and quality of life in major urban centers.

This public health  factor may have been especially critical.  China has always put a high value on political stability and its growing middle class became increasingly vocal about the extreme levels of air pollution shrouding its biggest cities and industrial centers.  And, China is very sensitive to its public image both at home and abroad and any impacts pollution might have to the tourism industry.  The Twitter feed from the air monitor on the roof of the US Embassy in Beijing became a potent symbol and daily reminder of the terrible air quality (as the Chinese government did not release their own air monitoring).  As public concerns both domestically and abroad grew toward a boiling point, officials began to crack down using existing pollution laws, closing some of the older coal plants, and imposing moratoriums on new coal combustion.

Additionally, concern about global climate change began to play an important role in China’s commitments and actions. While fossil fuel interests and climate-denying politicians in the US often point to China’s carbon emissions as a reason not to act, many experts and actions by China have increasingly exposed that excuse as hollow.  Chinese officials have long recognized the reality of global warming, and have made increasingly ambitious commitments to peak and reduce greenhouse gas emissions, leading to and including   China’s 2015 commitment to cap carbon emissions and its ratification of the Paris Climate Accord.

Finally, China’s coal use has been dropping faster than forecast in the international commitments or economic plans.  These trends resulted in coal use beginning to flatten and decline in China while coal imports plummeted.[1]  Obviously, the country has no long-term interest in supporting foreign coal producers while its own industry is facing huge issues with restructuring, mine closings, and layoffs.  Early in 2016, China’s largest coal producer, Shenhua, announced that it had become a net coal exporter as supply exceeded domestic demands.  All this was great news for anyone who cares about the global climate and terrible news for coal export proponents and coal industry investors.

Other Countries Not Picking Up the Slack

The coal companies and export backers initially were laser-focused on Chinese demand as the rationale for their investments. As we shared growing information showing that China’s coal use was flattening and need for imports disappearing, the terminal proponents changed their tune. “Don’t focus on China,” they said, “We’re talking to companies eager to buy our coal in South Korea, Japan, India, or [pick another Asian country].” Millennium’s CEO, Bill Chapman, claimed in May 2016 that the company was entirely focused on selling its product to Korea and Japan, and that therefore the precipitous drop in Chinese demand didn’t matter to its prospects.

While superficially plausible, these arguments ignored basic rules of supply and demand.  As the respected Wall Street analyst Bernstein Research pointed out in a  2013 report, Chinese demand entirely created the market for Pacific seaborne coal. “China has been almost 100 percent of global coal consumption growth over the last decade. . . . As Chinese consumption be­gins to fall. . . the global market will enter a period of terminal decline.”

The collapsing prices in that market over the past five years have stemmed from two factors: weakening Chinese demand and a rush of new supply from Australia, Indonesia, and other countries competing to serve these customers. Because their economies have been so closely tied to exporting coal and other basic commodities to China, the collapse in demand has led to another significant challenge for US companies: massive currency devaluations.  As the value of the Australian dollar and Indonesian rupiah plummets, it becomes even harder for US coal miners to compete.

Despite the wishful thinking of coal industry boosters, there are no new “Chinas” out there with the scale of economic growth and increased coal use that will pick up the slack as the real one bows out of the import game.

Coal’s Collapse

Though many were pointing out a permanent decline, no one could have predicted the speed or magnitude of the coal industry’s collapse.  But, by the spring of 2016, the four largest coal companies by volume—Peabody Energy, Arch Coal, Alpha Natural Resources and Cloud Peak—worth a combined $34 billion in early 2011 had declined to less than $50 million.  Of these companies, only Cloud Peak managed to stave off Chapter 11, most likely because it was the only one that hadn’t taken on massive amounts of debt to place failed bets on Asian exports.   Once a darling of Wall Street, the coal industry became a pariah as investors lost billions, more than 50 major companies went bankrupt, and most banks and other sources of capital turned their backs.

Even in the heady years of 2010-2011, some analysts began to express concerns that the Pacific coal market reflected a temporary bubble, with too many miners bringing on too much supply in Australia, Indonesia, the United States and other places to meet a temporary peak in demand, predominantly from China.  Prices of thermal coal for the Pacific market peaked in early 2011. Indications that the supply/demand situation was facing correction cropped up as early as 2012 , when reports surfaced of loaded coal ships being moored for months off Chinese ports as buyers cancelled orders.  By 2013, coal prices on the Pacific market had declined below levels that allowed coal companies to make a profit shipping from the Powder River Basin, even using existing ports.  Prices rebounded briefly in 2016, but most analysts believe that the reasons had more to do with restructuring in the China energy markets rather than a sustained rebound in demand. Futuresmarkets now predict continued low prices into the next decade.

Coal export backers and their chosen consultants have tried to reassure investors that the decline was only cyclical and continued to forecast rapid growth in Asian imports and prices. Nevertheless, most major financial firms began to see signs of a more fundamental and permanent shift in coal markets.  Analysts such as Bernstein, Citibank, Deutsche Bank, and Goldman Sachs began to issue very pessimistic forecasts on Asian coal demand and the prospects for US exports.  (The Goldman Sachs report was particularly significant when you recall that at the time a Goldman Sachs infrastructure fund owned 49 percent of Gateway Pacific’s corporate parent, Carrix).

Month after month, the pessimists were proved right, as Pacific coal prices continued to slide below levels that would make US exports profitable.  Cloud Peak, for example, told investors in 2014 that it was only making money on coal prices because it was buying hedges against the low prices.   In March 2017, Cloud Peak revealed that it was paying the Westshore terminal in British Columbia tens of millions of dollars to get out of its export obligations.

As these trends continued, private financing dried up for the coal industry as a whole and public opposition grew, the industry tried to quietly withdraw or shelve a number of the coal export proposals. In 2012, the proponent Rail America, shelved its plans for a new terminal at Grey’s Harbor, WA. In April 2013, the Port of Coos Bay, Oregon, announced that it had cancelled its agreement with Metro Ports California to build a new terminal.  The next month, the huge energy infrastructure company, Kinder Morgan, revealed that it was abandoning its efforts to construct a coal port in Port Westward, Oregon.

While stiff community, tribal and environmental opposition played a key role in these decisions, the biggest factor was likely the simple fact that the economics no longer made sense.  The remaining terminals involved proponents who were out over the tips of their skis, with huge sunk costs and no other path to attract investment.

A key milestone occurred in January 2014, when Wall Street giant Goldman Sachs sold its 49 percent interest in Carrix, the parent company for the Gateway Pacific Project, to a Mexican investor.  Although Goldman never publicly divulged the reasons for the sale, its research arm had previously published a major report stating that the window for coal exports was closing. In private conversations, a Goldman executive also revealed that fierce opposition from tribal, faith, and community groups raised internal concerns about whether the project was consistent with its commitments to global corporate social responsibility.

While the coal terminal proponents bitterly complained about delays in permitting and environmental reviews, there are many indications that the process had saved them tens of millions.  In October 2015, for example, an anonymous coal executive told S&P Global: “I believe these agencies and environmental groups are doing the coal producers a favor by not approv­ing or supporting the approval of these terminals. If the terminals were already built and in operation, few, if any, would be exporting coal as current pric­ing wouldn’t support it.”

In February 2016, Wood MacKenzie issued a report titled: Planned US Coal Ports: A Swift Trip from Vital to Irrelevant. This forecast was particularly significant because the company had long been the coal industry’s preferred consultants, issuing rosy forecasts that were used to support investments in coal exports, acquisitions, and other infrastructure.  Wood MacKenzie concluded that: “Building new Pacific Northwest Coal Terminals, once seen as essential, is now viewed as nothing more than a risky long-term bet.”

Arch Coal’s decision in May 2016 to abandon its 38 percent stake in Millennium highlighted the severe financial challenges facing coal export.  While Arch and Lighthouse (again Millennium’s sole owner) attempted to spin this as a “sale,” financial documents disclosed in Arch’s bankruptcy proceeding make it clear that this transaction reflected a “bankrupt company bailing on a zombie project.”

Arch received nothing of value from a more than $60 million investment in Millennium other than “a worthless option, a handshake, and a promise that they wouldn’t be sued for their trouble.”  Cloud Peak Energy, recently disclosed that it was writing off to $0 the value of a similar option to export coal through the Millennium terminal.

With Arch’s departure, Millennium’s sole backer is Lighthouse Resources (the new name for Ambre Energy).  Lighthouse is, in turn, wholly owned by a Cayman Islands private equity firm, Resource Capital Funds (RCF). RCF is a “vulture capitalist” that actively seeks out high-risk projects it can flip for a quick return. It has no experience or expertise managing or financing major infrastructure projects.  RCF became the sole owner of Ambre Energy (Lighthouse’s predecessor) when Ambre’s Australian owners had to walk away from a company that they had previously valued at $200-400 million for just enough money to pay their other largest creditors, a pair of South Korean utilities.  As with Arch’s investment in Millennium, the original backers essentially got nothing other than the right to walk away from the deal and a meaningless promise of a small share if the project moved forward.

Perhaps even more starkly, the April 2016 bankruptcy of Peabody Energy, the largest privately held coal miner in the world, was directly tied to a failed bet on coal exports. Peabody’s executives leveraged the company on the mistaken belief in a promised Asian “supercycle” which turned out to be a mirage. Even more specifically, Peabody’s bankruptcy (as well as the prior ones from former giants Arch and Alpha), were based on a bad bet on exponential growth in China’s steel industry and other industrial sectors.

Even more fundamentally, Peabody’s bankruptcy, as well as the demise of its biggest peers, reflects a failed bet on climate chaos: the assumption that the world would continue to accelerate coal use regardless of the climate consequences. Despite the overwhelming scientific consensus that we are going to have to leave the vast majority of known coal reserves in the ground if we hope to avert the worst impacts of global warming, Peabody’s management repeatedly doubled down on its assumption that we would use every ounce of the world’s coal. For example, former CEO Gregory Boyce testified to a House Committee:

“The U.S. has more coal than any other nation on Earth. We have hundreds of billions of tons of coal in the United States and trillions of tons of coal in the world. And we will use it all.”

This statement reflects stunning arrogance. It is also a clear bet on climate catastrophe – a bet on a future that experts have recognized would be beyond adaptation and would create severe consequences for our economy, human health and natural ecosystems.  Fortunately, Peabody’s and the industry’s collapse leaves it with significantly diminished political and financial clout to make this dystopian future a reality.

These efforts were successful in changing the narrative to a degree that would have been unthinkable several years earlier.  We worked hard to establish ourselves as credible sources on the plunging prospects for the remaining terminal proposals.  What started as an apparent juggernaut  in 2010 and 2011 soon became a graveyard of proposed terminals getting shelved or pulled or rejected by state and federal agencies.  Obviously, we can’t take credit for the coal industry’s self-immolation. But the finance and communications teams with Power Past Coal worked with many regional and national partners to ensure that the stories around these bankruptcies focused on the realities of the industry’s bad bets and the fundamental economics, rather than the companies’  attempted claims that it was over-zealous regulation and a “War on Coal” putting them out of business.

Stay tuned for this series soon continuing with more stories and perspectives from the Power Past Coal coalition