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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Why Trump Will Be Unable To Save The American Coal Industry

It is no secret that the coal industry has faced hard times for the last few years. Environmental concerns led President Obama to institute more stringent regulatory requirements, while cheap natural gas created intense competition. Against that backdrop, many coal industry participants and investors hoped that President Trump would be able to reverse those fortunes.

President Trump will undoubtedly do his best to help the industry, but recent events have shown that may be harder than it appears. Canada recently announced for instance that it would begin phasing out coal faster than it had previously planned due to increased environmental concerns. That’s a significant development because Canada is the fifth largest buyer of U.S. coal traditionally.



There is very little Trump or anyone else can do to make Canada buy more coal. Moreover, coal purchases by the Netherlands and India, the first and second largest buyers of U.S. coal respectively, are down on a year over year basis as well.

The Indian drop is particularly significant because India is really the last best hope for U.S. coal to recover. China has already put in place enough power generation capacity for its current needs. Moreover, with China’s economic profile weakening and likely to keep waning due to demographic issues, it is not likely that the country is going to become a big coal importer from the U.S. in the future.

In contrast, the Indian electrical grid is still extremely subpar, and massive investments are needed there. While India is building new coal-fired power plants, they are no guarantee that demand for U.S. coal will increase. India’s demand for coal has been mixed in recent years, with some years being better than others. A large but unreliable India as a buyer is not enough to save the U.S. coal industry. Related: Oil Prices Spike As OPEC Reaches Deal On Production Cut

U.S. coal exports fell 24 percent overall in 2015 and have fallen another 32 percent through the first half of 2016. Against this backdrop, it is little wonder that roughly half of U.S. coal production has entered bankruptcy in the last few years.

President Trump has vowed to help bring back the industry by rolling back environmental regulations, offering tax breaks to invest in infrastructure and ending a moratorium on mining on federal land enforced by President Obama. While the new President can certainly help reduce industry costs by, among other things, canceling Obama's Clean Energy Plan, which would force power plants to capture more greenhouse gases, it is not clear if this will be enough.

Fundamentally coal is losing enormous amounts of market share domestically and abroad to other forms of power. Renewables have played a role in this decline, but the actual villain in the coal story is natural gas. The glut of U.S. natural gas has created a tremendous amount of downward price pressure and led U.S. power plants to convert from coal to natural gas.

(Click to enlarge)

President Trump can help the coal industry. Rolling back power plant regulations on coal and rolling back coal mining regulations should reduce both the cost to use coal and the cost to mine it. That will help to stave off further power plant changeovers, and will enable more coal mines to operate profitably. All of that is good, but it is unlikely to be enough to revive the industry to its former glory.

The IEA is also skeptical of the marginal impact on coal mine profitability from Trump’s proposals. Market equilibrium for the U.S. coal industry will require further industry consolidation and more mine closures according to the group. U.S. coal won’t disappear completely, but the industry will keep shrinking through the early 2020’s in the IEA’s view.

Overall, the only coal mines that are likely to survive in the long run are those where both mining and transport coal is cheap. Reducing regulatory costs will help, but it is not a panacea by any means.

Michael McDonald of Oilprice.com

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