POWER October 2015 - 41

FUELS
Where Is Coal Generation's New Floor?
After a horrible year for coal producers'
finances, how much market share can this
critical industry yield to natural gas, nuclear,
and renewables?
Echoing statements by CSX railroad, Alliance
Resources CEO Joe Craft III, and others,
a recent research note by analysts from
JPMorgan Chase & Co. places that floor
at above 30%, or roughly coal's electrical
generation share in April. " We believe grid
inflexibility makes reducing coal's share below
this level difficult until more is spent
on the grid, pipelines and more gas power
plants, " John Bridges and Anant Inani, analysts
at JPMorgan, said in the report.
Coal may even see slight increases in
demand before President Barack Obama's
Clean Power Plan begins to take effect in
2022. " It's reasonable to assume that once
the U.S. gas market begins to balance, and
will still require the extraction of hundreds
of millions of tons annually. And as long as
there's a market for that coal, there will be a
host of producers ready to mine it.
When you look more closely, what we
are seeing is King Coal's demise in Central
Appalachia (CAPP), where coal has been
heavily mined since the 1860s. Though this
collapse appears sudden, CAPP production
has been shrinking for decades, and the
fundamentals eroding CAPP's market share
were well understood within the industry.
When Arch and Peabody divested much of
their holdings in the region to form the nowbankrupt
Patriot Coal, they did so with the
implicit understanding that the best days for
this region were already behind it.
However, like excited surfers, a decade ago
Patriot, Arch, Alpha, and others in the industry
rushed to ride a gnarly wave of demand
for premium metallurgical (met) coal (used
to make steel)-still found in West Virginia
and parts of eastern Kentucky. Several of the
largest banks and financial institutions worldwide
were more than happy to lend billions
to the industry as it chased hungry Asian and
other export met and thermal coal markets,
creating a large, though short-lived, bubble.
Once trading at nearly $300 a ton, the benchmark
price of the highest grade met coal has
dropped 72% since April 2011. Third-quarter
prices are hovering around $93 a ton, further
crushing the earnings of met producers.
The companies that have recently gone
bankrupt either produce most of their coal
in CAPP, were betting heavily on selling
sustained high volumes of met coal,
October 2015 | POWER
the gas price picks up, that coal's market
share will recover to the mid or even high
30's percent prior to " the law's implementation,
they said.
According to Craft, " there appears to be
deliverability issues, must-run coal plants
or other factors " that keep coal's floor at
30% or more. " I can't pin point it precisely,
because when you look at the spreadsheets,
it would suggest that there should
be more competition. But in reality, what
we are seeing, is that when the coal share
gets closer to 30%, there seems to be a
floor to where, no matter what the gas
price is, the coal plants are running. "
But let's not forget, from a utility perspective,
having King Coal around holds
Prince Gas's feet to the fire. Fuel flexibility
and competition keep both industries
in line.
or both. Today these markets have gone
away-once again rendering CAPP coal
too expensive to mine for it to successfully
compete with either natural gas or other
types of coals for power generation. As
Alpha submitted in its bankruptcy filing,
" The U.S. coal industry as currently structured
is unsustainable. "
rie, in The New York Times. He estimated the
industry needs to shrink by about 25% to meet
current demand. But as coal companies " go
through bankruptcy, their assets aren't going to
shut down. " As the industry restructures around
a new " negative growth " paradigm, several
more companies may file for bankruptcy, especially
those that heavily leveraged themselves in
order to gain access in CAPP-think Arch.
But as the industry stands at this crossroads,
it's important to take a deeper look at
what's really going on, why certain companies
are failing, and why a few are actually
thriving in the midst of this chaos.
How Alpha and Other Coal
Producers Got Throttled
Wall Street and the general public often treat
all coal companies as equal-and all coal as
fungible, like oil. But this is far from the case.
The pain the industry is feeling is mostly
coming out of Central Appalachia. Nationwide,
1,061 mines produced a total 984.8
million tons in 2014. In excess of 380 million
of those tons were extracted from just
two counties in Wyoming's Powder River
Basin (PRB). Though plentiful and fairly
easy to mine, this subbituminous coal has a
much lower heating value than Appalachian
and Midwestern bituminous coals (8,400
Btu/lb vs. 12,000 Btu/lb vs. 11,500 Btu/lb
respectively), so it takes considerably more
PRB coal to generate the same calorific heat
as eastern coals. Therefore, PRB mines have
" Neither Alpha nor the U.S. coal industry
should be thought of in the past tense-
while the sector will likely get smaller,
coal will continue to play a critical role
in providing affordable and reliable electricity
and in the production of steel for
infrastructure. "
-Kevin Crutchfield, CEO, Alpha Natural Resources
Just the same, CEO Kevin Crutchfield believes
that " neither Alpha nor the U.S. coal
industry should be thought of in the past
tense-while the sector will likely get smaller,
coal will continue to play a critical role in providing
affordable and reliable electricity and
in the production of steel for infrastructure. "
" It's premature to say the industry is dead, "
said Anthony Young, an analyst with Macquawww.powermag.com
to
produce much more product to stay competitive-which
is partially why most PRB
mines yield massive volumes (Figure 2).
Peabody and Arch both have several large
PRB mines that are helping buoy their financial
returns in this difficult market. In fact,
the two largest mines in the U.S, one each
owned by Peabody and Arch, are helping
keep both companies afloat.
41
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POWER October 2015

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