Why Appalachian Coal Can’t Compete With Colombia

Deep in U.S. coal country, people are suffering economically not just from the White House's determination to reduce America's dependence on coal, but also because of competition from an unlikely place: Colombia.

To be sure, an abundance of cheap natural gas is responsible for most of economic hurt in mining states like West Virginia, Kentucky, Tennessee, and Pennsylvania. Record natural gas production from shale has given utilities a cheaper, and cleaner, fuel.  

Also, as Republicans are eager to point out, environmental regulations have put a gradually tightening noose around the neck of Big Coal. With new limits on toxic emissions, and looming new restrictions on greenhouse gas emissions, the coal industry is facing a period of structural decline.

But surprising data just released from the Energy Information Administration shows that Appalachian coal is losing market share to cheaper coal from Colombia.

Despite being one of the largest producers of coal in the world, the U.S., confusingly, also imports coal. That's because imports from Colombia can be cheaper, at least for the large market on the U.S. East Coast.

There are a few reasons why.

First, labor is cheaper in Colombia. Second, maritime shipping is cheaper than rail to some places on the U.S. Eastern Seaboard. For example, moving coal from Appalachia - from mines in West Virginia, Kentucky, Tennessee, and Pennsylvania -- to Florida adds $26 to a ton of coal, while importing Colombian coal adds just $15 per ton.

Beyond that negative, the coal seams of Appalachia have been mined for over a century, and consequently, the richest coal deposits have been mined out.

Another advantage of Colombian coal is that it burns relatively cleanly, with low sulfur. For utilities seeking to comply with increasingly stringent limits on air pollution, low-sulfur Colombian coal can provide added flexibility.

One final factor undermining Appalachian coal is low international prices. China, which consumes as much coal as the rest of the world combined, and is by far the largest driver of the global coal market, is seeing its economy slow. As a result, Chinese coal consumption is expanding at a much slower rate than expected.

Meanwhile, several new coal mines have opened in recent years (mainly in Australia) in hopes of capitalizing on Chinese demand. The result has been depressed international coal prices, which has sent U.S. utilities looking for cheaper coal abroad.

And Colombia has become the exporter of choice for coal imports to the U.S. East Coast. The South American country has seen its coal exports spike over the last decade, enough to make it the world's fifth largest coal exporter. In 2012, Colombia accounted for three-quarters of U.S. coal imports.

Higher coal imports are coming even as overall coal consumption in the United States is drifting downwards. In an Aug. 13 article, The Wall Street Journal wrote about the trend towards more imports. Appalachian coal sells for $79 to $86 per ton while utilities on the U.S. East Coast can import Colombian coal for $75 to $82 per ton.

To be sure, the article goes a bit overboard. While U.S. coal imports have experienced an uptick, they are a small fraction of what they were in the mid-2000's (see EIA chart). A brutally cold winter in 2014 led to a spike in coal use. As a result, coal consumption will likely rise by about 3 percent in 2014 compared to the previous year.

However, the temporary rise in coal consumption does not change the long-term picture for coal in the United States, which is one of gradual decline. But the situation for domestic miners is even worse than many anticipated - it appears that the coal industry in Appalachia not only has to worry about cheap natural gas and environmental regulations, but also about cheaper coal from abroad.

By Nick Cunningham of Oilprice.com