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Coal For Thee, But Not For Me

Brian Murray

This, of course, is not welcome news to U.S. coal-producers, who have been hard hit by the decline in coal used to generate electric power, which has fallen from 48 percent of the U.S. generation mix in 2008 to 28 percent today. U.S. coal production has dropped 35 percent in that same time period.

Recent Spike in U.S. Coal Exports Counters Decline in Domestic Coal Demand    

But amid the slackening demand for domestic coal use in the U.S., there has been a recent and substantial uptick in the demand for exported coal.

After falling for years, U.S. coal exports have surged recently, climbing 61% in 2017 and further expanding into 2018. Prior to last year, coal exports seemed as depressed as the domestic market. Between 2012 and 2016, coal exports fell by more than half. This was on top of export price declines of nearly 40 percent during that period. Together the domestic and export woes hit coal-reliant states such as West Virginia very hard, with a nearly one-half decline in coal-sector employment in four years. Thus in some corners of the Mountaineer State, the second largest coal producing state but by far the largest exporter, the export bump is seen as a ray of hope on an otherwise challenging landscape.

Why The Export Surge?

While Europe remains the largest customer for exported U.S. coal, an increase in demand from Asia has sparked the recent export surge. U.S.-mined coal is used both for thermo-electric power generation and for metallurgical purposes (coking in iron and steel production), but the swings have been driven more by the former.

What’s going on in Asia? India has been building coal-fired power plants at a brisk clip and can only meet part of its supply needs domestically because of the type of coal extracted there. Japan’s increase in coal imports follows its movement away from nuclear power after the Fukushima disaster and South Korea is following suit. Together, U.S. exports to those two countries increased nearly five-fold in 2017. And weather conditions last year curtailed Chinese hydropower, further pushing out Asian coal demand, while also mitigating Australia’s ability to respond to bump up coal supply to meet the growing regional demand.

Will Coal Exports Revive the Long-term Prospects of the U.S Coal Industry?

The National Coal Council clearly hopes so. In a report entitled Advancing U.S. Coal Exports, they address a number of questions directed at them by Energy Secretary Rick Perry on ways in which the U.S. can capitalize on market opportunities, build infrastructure and clear regulatory hurdles seen to restrict exports. The report recommends establishing an Energy Department-led, government wide Coal Exports Task Force, which would in turn implement seven recommendations addressing demand and supply challenges.

One critical question is whether the recent growth in export demand is sustainable. The U.S. is a major exporter of metallurgical coal but is considered a “swing” supplier of coal for thermo-electric use. As one of many participants in a global market, the demand for U.S. coal exports depends not only on fluctuations in overall global demand, but on competition from other exporters and periodic supply shortages elsewhere. Exports are also affected macroeconomic factors such as currency exchange rates, and trade policy.

But things can get messy on the trade policy front. Metallurgical coal exports also went up substantially in 2017, but most of those exports went to countries that, in turn use it to make steel that they export to the U.S.  With the Trump Administration’s recent steel import tariffs on several of those countries, this complicates matters for metallurgical coal exports considerably.  Two of the countries that import U.S. coal and export steel to the U.S., Brazil and South Korea, have negotiated steel tariff exemptions, but three countries – Japan, Canada, and India – have not.

Long-term export demand for thermal coal will be influenced by what countries do about commitments made under the Paris Climate Agreement. Major emitting countries such as China and India are large users of thermal coal and that use is increasing for now, but will need to taper off and decline in the future if the Paris commitments are to be kept. Coal demand will also be affected by the pace at which low and zero-carbon alternatives become more economic and more reliable over time – a pace that has been rapid of late, but the future trajectory will be determined by an emerging mix of technological, market, and policy factors.

On the supply side, U.S. coal exports are limited more by infrastructure than the abundance of the resource itself. The National Coal Council report takes special note of export port and terminal capacity and the need for regular dredging, especially for east coast ports. West coast ports are deeper, closer to Asian markets, and closer to western U.S. producers, but so far state leaders in Washington, Oregon and California have turned down proposals for coal export terminals there.

What Does All This Mean?

While improving port export capabilities can lower transport costs, it seems likely that even with these improvements the U.S. would remain a swing supplier on world markets, with spikes in exports when global demand is up, major suppliers face periodic shortages, or the value of the dollar declines to more export-friendly levels. Of course, drops in export demand happen when the opposite occurs. For a country with historically large production and domestic use of coal, export markets are inherently more volatile than domestic ones. So if exports do rise in their relative importance for U.S. coal, producers will need to buckle up for the roller coaster ride that comes with it.

[Will Niver of the Duke University Energy Initiative provided research assistance – and the catchy title – for this article]

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