(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, May 7 (Reuters) - U.S. coal miners have been among the biggest victims of the shale revolution and tougher emission controls on power plants.
But while the massive low-cost open-cast mines west of the Mississippi have seen output hold up, high-cost producers in the east have borne the full brunt of falling domestic coal combustion.
U.S. coal miners produced about 1,016 million short tons last year, down just over 7 percent from 1,094 million tons a decade earlier, according to estimates published by the U.S. Energy Information Administration (EIA).
Production losses have been concentrated in the eastern portion of the country, especially the smaller, older and more challenging mines of Appalachia. Regional output sank to just 294 million tons in 2012, down by a fifth from 369 million in 2002.
Output has been hit particularly hard in eastern Kentucky, where production is down 32 percent or 31 million tonnes a year compared with 2002. Other big falls have occurred in West Virginia (15 million tonnes, 10 percent) and Pennsylvania (9 million tonnes, 13 percent).
By contrast, output from the Interior region has risen by 30 million to 180 million tons, and output from the mega mines of the West, which includes Wyoming, has remained flat at about 540-550 million tons. Wyoming’s production alone has risen by more than 25 million tons over the last decade to over 400 million (Charts 1 and 2).
The entire coal industry is under pressure from cheap gas prices and increasingly tougher clean air regulations, which have seen many power generators switch to cleaner burning natural gas or renewables like wind.
Power generators consumed 827 million short tons of coal last year, down from 988 million tons in 2002 and a peak of more than a billion tons in 2007. At the same time, gas consumption has surged, from 6.1 trillion cubic feet to almost 9.5 trillion (Chart 3).
Appalachian miners are at a fourfold disadvantage. Their nearest customers are being hit hardest by shale. Their mines are smaller and less efficient. Their coal is relatively high in sulphur that is costly for power producers to remove from the exhaust gases. And they are on the wrong side of the country to benefit from strongly growing coal demand in Asia.
Coal is a high-volume low-value commodity. Transport costs play an important role in consumption decisions. Most of the country’s coal-fired power plants lie in the central and eastern parts of the country, where they have traditionally sourced large quantities of coal from producers in Appalachia and the Interior.
Power plants in just two census regions - East North Central (Illinois, Indiana, Michigan, Ohio and Wisconsin) and the South Atlantic (Delaware, District of Columbia, West Virginia, Maryland, Virginia, the Carolinas, Georgia and Florida) - accounted for almost 44 percent of all power generated from coal in 2002.
Other parts of the East were responsible for most of the rest. The Pacific West and Mountain states accounted for just 10 percent of coal-fired generation in 2002.
The amount of power generated from coal has fallen in 8 out of 10 census regions over the last decade, and in 37 states. Just 11 states generated more power from coal in 2012 than 2002.
But as the largest users, eastern regions have experienced some of the biggest reductions. Generators in the South Atlantic states cut their consumption by almost 78 million tons last year compared with 2002 (19 percent).
New England’s coal consumption for electricity generation has been slashed by almost two-thirds, while the Middle Atlantic states of New York, New Jersey and Pennsylvania have seen an average reduction of 21 percent (Chart 4).
Chart 1: link.reuters.com/cec87t
Chart 2: link.reuters.com/kac87t
Chart 3: link.reuters.com/nac87t
Chart 4: link.reuters.com/qac87t
Chart 5: link.reuters.com/sac87t
Coal’s last big redoubt is in the East North Central region - the five states bordering the Great Lakes to the south and west. Not only is the region the largest coal-fired power generator in the country, it has also seen one of the smallest percentage declines over the last 10 years. Even here, though, coal is under attack from environmental regulations.
In 2011, Wisconsin relied on coal for 63 percent of its electricity generation, and the state has lagged behind in the development of clean alternatives like wind farms. On April 22, however, the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Justice announced a settlement with the Wisconsin Power and Light Company for alleged violations of the Clean Air Act.
The deal will require Wisconsin Power and Light to invest more than $1 billion in pollution control at three large coal-fired power plants and to permanently retire, refuel or repower four other coal-fired generating units. The firm also agreed to spend up to $5 million buying solar power or installing solar panels.
It is the 26th settlement EPA has reached as part of an aggressive enforcement programme targeting coal-fired plants nationwide. Enforcement is making operations more difficult for existing coal generators, even before new emissions standards come into force in 2014-15 effectively barring construction of new coal-fired plants without carbon capture and storage (CCS) technology.
Appalachia’s mines tend to be smaller and more expensive than those in the Interior and especially the huge mines of the West.
In 2011, Appalachia had 1,141 working mines, producing an average 295,000 short tons per annum. By contrast each of the 103 mines in the Interior was producing almost 1.05 million short tons on average. The 52 massive mines in the West averaged more than 11 million. Wyoming’s 17 massive open-cast pits produced an average of almost 26 million tons each in 2011.
Crucially, the West contains the largest reserves of low-sulphur coal. As emissions controls become increasingly stringent, the West’s low-sulphur production has become more attractive for domestic power producers.
More than 80 percent of the country’s low-sulphur coal is found in the West. Most coal output in Appalachia is medium or high sulphur, and the Interior region’s coal is almost all high in sulphur, according to EIA estimates.
Miners have turned to export markets to make up for some of the demand lost at home.
Exports of both metallurgical grade and thermal coal have risen steeply, doubling since 2009. Nearly 70 million tons of metallurgical grade coal and 45 million tons of other (thermal) coal were exported last year, according to the U.S. International Trade Commission (USITC), up from 37 million and 17 million tons respectively in 2009 (Chart 5).
Virtually all exports are sent east and south by rail and barge to the East and Gulf Coast before being loaded onto bulk carriers. More than 47 million tons were exported last year through Norfolk, Virginia, while New Orleans handles 25 million tons, Baltimore, Maryland handles over 19 million and Mobile, Alabama does 8 million.
Most coal still heads to traditional export markets Europe, Canada and Latin America, most of which have taken increasing amounts in the last decade (Canada is the main exception, where exports were down in 2012 compared with 2002).
But coal producers are eyeing major potential new markets in Asia, especially China. Despite having enormous domestic reserves and production, “China replaced Japan as the largest coal importer in 2011,” according to the International Energy Agency and “China now drives development of the global coal market on the demand side,” (“Coal Medium-Term Market Report 2012”).
Western coal producers are far better placed to take advantage of new markets in Asia. Proposals to develop new export routes to take coal from Montana and Wyoming by rail and barge to the West Coast then tranship it to Asia via new terminals in British Columbia, Washington state and Oregon have sparked a fierce opposition from environmentalists and community groups.
But assuming these terminals are eventually approved, the Western mega mines stand to be the main beneficiaries, entrenching the growing divide between decline in the East and a healthier coal industry in the West.
Reuters customers can now access all columns via the new Top News page for Commodities Commentary and Insight or in Eikon Home -> Front Page -> More Categories -> Commodities Commentary and Insight. (Editing by James Jukwey)