President Donald Trump has pledged to “put our miners back to work” in the US, promising to return high-paying jobs to rundown rural areas of states such as Pennsylvania that brought him victory in last year’s election. Trends in coal markets, both in the US and internationally, suggest that will be an uphill battle.
World demand for coal is projected to flatline
In 2013, the US Energy Information Administration projected that world coal demand would rise 39 per cent by 2040. Now it is expecting growth of just 1 per cent. If not quite “Peak Coal”, it certainly looks like an extended plateau. Projections of energy demand even a few years into the future can never be relied on: there are too many uncertainties in how markets and technology will evolve, and the EIA itself makes clear that this scenario is just one among many possible outcomes. Even so, the latest projection, from the EIA International Energy Outlook 2017, published last week, shows that the promise of eternally rising world demand for coal, which was the consensus expectation just a few years ago, can no longer be taken for granted.
Coal consumption is expected to fall in China and the US
China dominates world coal markets, accounting for more than half of total global demand. The EIA believes that Chinese coal consumption may now be on a declining trend, with industrial use for steam and steelmaking already having peaked, and demand for power generation likely to peak around 2023. With demand also in long-term decline in the US and in Europe, growth in some emerging economies, led by India, is not enough to raise total coal use overall.
US coal production has been rebounding
The US coal industry has been enjoying a modest upturn over the past 18 months or so. Production has picked up from its lows early in 2016, and is expected to retain those gains into next year. The key factor here has been the rise in gas prices, which has made coal more competitive for power generation. The rebound has been strictly limited, however. Coal-fired plants generated just 30 per cent of US electricity last year, the lowest share on record, and that is expected by the EIA to rise to 31 per cent this year and 32 per cent in 2018.
US coal prices have also picked up
The rise in natural gas prices has also helped boost prices for US coal. Eastern Rail coal, a benchmark for central Appalachian thermal coal, burnt in power plants, is up about 70 per cent from its low point last year. Some international prices have risen even more strongly: benchmark thermal coal at Newcastle, Australia, has more than doubled in price from its lows. Those prices have been helped by supply constraints, however, including heavy rains and flooding in Indonesia that have disrupted production. If the EIA is right about falling demand in China, the longer-term outlook will not seem so attractive.
The US power industry is focusing on gas and renewables
Coal still plays an important role in US power supplies, but unattractive economics mean no power generators are planning to invest in new coal-fired plants. US utilities are betting heavily on gas-fired plants and wind and solar power. Investing in new gas and renewable generation can be more attractive than running old coal and nuclear plants. IHS Markit argues in a new report on Tuesday morning that the loss of diversity in the fuel mix for power generation threatens to make electricity supplies more expensive and less resilient to shocks such as extreme cold weather.
Existing coal plants risk becoming uneconomic
The only practicable way to stop that threatened loss of coal-fired and nuclear plants will be intervention in the market to provide them with additional support. IHS Markit argues that those moves should not be seen as market-distorting subsidies, but as ways to correct distortions already caused by mandates and tax breaks for renewable energy. Without that kind of intervention, though, the closures of coal-fired plants are likely to continue. Carbon Tracker Initiative, a think-tank that works on climate change and finance, argued last week that, including all expected future costs, about 78 per cent of all US coal-fired plants could be replaced by a new efficient gas-fired plant, and save money. Companies that own a lot of coal-fired power plants have an incentive to shut them down. If they do not, their earnings could suffer, or they could face a “consumer revolt” from customers who decide they are being overcharged.
Coal jobs have been in decline for a long time
Employment in the US coal industry was falling even when output was rising in the 1980s and 1990s, as mining became more efficient. All the growth came from mines west of the Mississippi, which are often open-pit and need many fewer workers for each ton of coal extracted. That trend for the industry to head west is likely to continue, making a revival in production in the old Appalachian coal country from Pennsylvania to Tennessee even less likely.
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