Similar to oil and gas prices, U.S. coal prices have hit multi-year highs as Russia's war in Ukraine and an economic rebound from the pandemic have upended international energy markets and driven up demand for fossil fuels. Indeed, U.S. coal prices surged to an all-time high of $439 per metric ton in March before pulling back to $331/ton, still good for a nearly 140% increase in the year-to-date. In comparison, crude prices have increased 45% YTD while natural gas has jumped 133%.
Stocks of leading coal producers have outperformed Big Oil stocks, with Peabody Energy Corporation (NYSE:BTU) up 166.1% over the past 12 months; Arch Resources, Inc. (NYSE:ARCH) has gained 201% over the timeframe, while Alliance Resource Partners, L.P. (NASDAQ:ARLP) and CONSOL Energy Inc. (NYSE:CEIX) have surged 190.0% and 259.4%, respectively.
Unfortunately, the same cannot be said about the health of the U.S. coal industry.
U.S. coal producers are badly struggling to boost exports to cash in on soaring prices thanks to big headwinds including labor shortages, shipping bottlenecks and--more importantly--a dismal long-term outlook discouraging investments in new mines.
For many years, the U.S. coal industry has been in terminal decline, driven by federal and state efforts to cut carbon emissions with utilities replacing coal with cleaner-burning natural gas, and solar and wind power. U.S. President Joe Biden has set a goal to decarbonize the U.S. power grid by 2035 to fight climate change.
Coal Prices (USD/MT)
Source: Business Insider
This outlook means that the United States is unlikely to play a major role in international efforts to expand shipments of the fuel to Europe despite holding the world's biggest reserves of coal.
The European Commission has already proposed banning Russian coal as part of a new round of sanctions against the Kremlin for its unprovoked war on Ukraine, a ban that could come as early as August. It also means that the coal price rally will do little to pull the U.S. coal industry out of its tailspin.
"The ability of U.S. companies to respond (to the price rally) has been limited by logistics challenges, like most industrial activity at the moment," Ted O'Brien, managing partner and chief commercial officer at Pittsburgh-based coal marketer Oluma Resources, has told Reuters.
In its May Short-Term Energy Outlook, the U.S. Energy Information Administration (EIA) has reported that U.S. coal production year-to-date is up 3.8% from the same period in 2021, but exports have failed to keep up. Shipments of U.S. coal abroad in the first quarter of 2022 slipped about 2.5% year-on-year to about 20.2 million tons, the EIA said. And the logistics hurdles prompted the EIA to lower its 2022 U.S. coal export forecast to 85.7 million tons, down about 3.7% from its previous prediction in April.
The EIA has projected that U.S. coal production will increase a mere 3% in 2022 as domestic utilities seek to replenish depleted stockpiles. According to the EIA, U.S. coal production will increase by 20 million short tons (MMst) in 2022 to 598 MMst and by 7 MMst (1%) in 2023. The forecast small increase will occur despite coal use in the power sector continuing to decline.
Although exports and inventory builds contribute to rising coal production in the forecast, labor shortages, rail congestion, and challenges obtaining equipment are expected to limit production gains.
That said, some U.S. coal companies are still expected to do well.
One such company is Alliance Resource Partners, which has mines from Illinois to West Virginia. President and CEO Joe Craft sees the war driving U.S. export prices for both thermal coal burned in power plants and metallurgical coal used to make steel higher than prices for domestic coal for at least 18 months. As a result, Alliance's export volumes should be more than 6 million tons this year, up from about 4 million tons last year, and likely will grow by an additional 1.5 million tons in 2023, Craft revealed in a first-quarter earnings call this month.
But ultimately, long-term growth, as well as an industry-wide expansion of exports, is highly unlikely to happen largely because of climate concerns and also due to the fact that few companies have new mines coming, with most new investments going towards sustaining output from aging facilities.
"I think we'll continue to generate cash out of these assets, but we're simply not going to put any more cash into them. It's not what our shareholders want and I don't think it's a good investment for us." Arch Resources CEO and President Paul Lang has told Reuters.
The world's oceans in 2021 grew to their warmest and most acidic levels on record, while melting ice sheets helped push sea levels to new heights, the World Meteorological Organization has reported.
The report came following the latest U.N. climate assessment, which warned that humanity must drastically cut its greenhouse gas emissions or face increasingly catastrophic changes to the world's climate. Fossil fuel combustion (burning) for energy accounts for 74% of total U.S. GHG emissions and 92% of total U.S. anthropogenic CO2 emissions. Accounting for ~14.5 billion tonnes of CO2 emissions every year, coal is the biggest culprit as far as GHG emissions go, followed by oil at 12.2 billion tonnes and natural gas at 7.4 billion tonnes.
Source: Our World In Data
By Alex Kimani for Oilprice.com
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