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Charles Kennedy

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Weak Chinese Demand Could Undermine Entire Coal Market

China imported coal at the slowest rate in almost four years, sending coal markets into a tailspin. For the month of February, China imported 5.86 million metric tons of thermal coal, a 46-month low, and a nearly 50 percent decline year-on-year. The dip may have seen a bit of an artificial dip as China’s Lunar New Year resulted in slower industrial activity.

Part of the problem is illegal coal production in China. The central government last year propped up struggling producers, but that has led to a supply glut as inefficient producers continue to mine coal. Now the government is seeking some of the biggest coal producers to crack down on illegal production.

Related: Beyond Iran And Pakistan: 7 Nuclear Wannabes

Nevertheless, falling Chinese demand for coal is also a big contributor to depressed prices. Air pollution is the proximate cause, forcing the central government to curb smog in order to prevent a breakdown in social stability. China plans on capping its coal consumption within the next five years and is already forcing the dirtiest coal plants to shut down.

That has the worldwide coal industry in uncertain times. On the other side of the Pacific, the U.S. coal industry is facing “structural decline,” as a recent report from the Carbon Tracker Initiative concluded. A combination of natural gas, cheaper renewable energy, and ever-tightening environmental regulation will force the closure of 60 gigawatts of coal-fired power plant capacity by 2020, and 92 gigawatts by 2030. That is equivalent to more than one-quarter of coal plant capacity. Related: Three Triggers That Will Send Oil Crashing Again

Fewer coal plants mean less of a need for coal to be mined. More than two dozen coal mining companies have gone bankrupt in the past three years, and an estimated 264 mines were shuttered between 2011 and 2013. An overwhelming share of that pain is concentrated in Appalachia. On March 23, Patriot Coal temporarily idled several mines in West Virginia because of weak demand.

The Appalachian coal mining industry is not going down without a fight. The President of the West Virginia Coal Association is focusing on revising state laws to cut costs. “We're under assault, and it's all hands on deck as we look to make the assault we can provide, focusing on state rights,” Bill Raney said. “We're up against these emission rules and regulations from federal agencies, and we're putting up some stop-blocks to do what we can for West Virginia coal.”

Related: No Country For King Coal – The Changing U.S. Energy Mix

He’s facing an uphill battle. The average cost to produce one short ton of coal from Central Appalachia is $65 dollars. Coal from Illinois can be produced at half of that cost. For 2015, almost three-quarters of coal production from Central Appalachia is unprofitable given today’s coal prices. Not only will that mean that mine closures will continue, but they could accelerate as even more coal-fired power plants get shut down.

Unlike in past downturns, the current coal bust appears to be structural, not cyclical.

By Charles Kennedy of Oilprice.com

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