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Bad News for West Coast Coal Exports

U.S. coal miners like Arch Coal (NYSE: ACI  ) , Alpha Natural Resources (NASDAQOTH: ANRZQ  ) , and Cloud Peak Energy (NYSE: CLD  ) are hoping to grow their export sales. But regulators in Washington state appear to be taking a dim view of the port projects that are required to keep exports growing. That's a big setback.

Looking abroad for growth
Although an increase in the price of natural gas has increased coal's share of the domestic energy picture recently, material growth isn't on the horizon. That's because the U.S. energy market is largely mature and increasingly concerned with the impact of carbon-based fuels.

That's not the case in developing nations like China and India, where even if coal's share of the energy pie were to decline, overall consumption could still increase. That's because these two nations are still building their energy infrastructure so they can provide reliable power to their citizens.

Understandably, U.S. coal miners are looking overseas in the hopes of expanding their businesses. For example Cloud Peak sends just 5.5% or so of its Powder River Basin (PRB) thermal coal overseas, though, up from 1% about five years ago. It has a solid foothold in Korea but has been sending test coal to Japan in the hopes of extending its reach.

Getting coal on the water
The only problem is that Cloud Peak doesn't have much access to export terminals. It's waiting on the Gateway Pacific Terminal to get built, hopefully in 2018, before it can materially increase its exports. Cloud Peak has a deal for a third of the port's 46 million ton coal capacity. Without that terminal, it will have a hard time selling it's coal into foreign markets.

While Arch and Alpha both have more port access than Cloud Peak, they still need more ports to be built if they want to turn exports into a growth engine. Sadly, Washington state just put a damper on U.S. coal's export dreams.

Environmental impact
One of the big debates is how to assess the environmental impact of proposed terminals. One side believes the view should be limited to the impact on the area around the terminal. The other side wants to take into consideration the impact of the products being shipped on the environment in their destination markets. So, for coal, that means the environmental impact includes the burning of the fuel in China. Washington state just chose to take that broad view of the environmental impact of the Millennium Bulk Terminals project, a 44 million ton capacity port that Arch Coal is supporting in the hopes of sending more PRB coal to Asia.

It's going to be much harder for the port to clear that environmental hurdle. Worse, Washington's decision sets a bad precedent for other terminals, like Gateway, that are still being reviewed. Of course Asia, which is the destination for most of the exports off of the West Coast, isn't the only foreign coal market. For example, Alpha Natural Resources recently inked a deal to send coal to Europe from its eastern operations. That said, Alpha has a small but growing presence in the export constrained PRB.

Note, too that CONSOL Energy (NYSE: CNX  ) chose to keep its Baltimore port when it sold off about half of its coal operations late last year. Clearly it continues to see coal exports as an important part of its business. It only uses a portion of the terminal's export capacity, so CONSOL could increase exports with relative ease compared to miners like Cloud Peak.

Strangely, the best positioned miner might actually be fellow PRB giant Peabody Energy (NYSE: BTU  ) . Although it, too, would like to see more export terminals built in the United States, it's Australian operations are already serving Asian demand and it just inked a 50/50 joint venture with Shenhua Group to send thermal coal to China.

Monitor this issue!
If you are watching the U.S. coal space, keep a close eye on port access and permitting. Although the industry should see solid domestic demand for years to come once the market stabilizes, growth will have to come from increased exports to growing foreign markets like Asia.

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  • Report this Comment On February 24, 2014, at 1:38 PM, yimudi wrote:

    Your opinion is totally wrong. Actually coal miners welcome a broader view. Why, there are too many dirts in coal produced locally in China, e. g. sulfur. PBR coal contains only 1/3 of sulfur compared with 'chinese' coal. the only draw back is it takes too long time for viewing. Please note, the final report has to be accepted by Chinese if coal burned in China. You can imagin how Chinese would say about PRB coal if they import PRB coal in quantity. I wonder why you don't know this. If simply in the point of CO2, Washingto State would simple ban any coal output from the state.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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