Developers of two giant coal-export terminals proposed in Washington “are facing severe headwinds” in a volatile global energy economy, a nationally-known consultant on the economics of coal said Wednesday in Seattle.
In presenting his findings, Tom Sanzillo of the Institute for Energy Economics and Financial Analysis, was joined by researchers with Sightline Institute and Climate Solutions, Seattle organizations that oppose coal exports.
Sanzillo’s conclusions are based on a decline in American exports to Asia, which has caused serious under-use of capacity at existing coal ports. Export levels for 2014 are much below highs of two years ago and could result in the use of only 34 percent of the coal capacity of existing ports.
For Washington’s two proposed coal ports -- Gateway Pacific at Cherry Point north of Bellingham and Millennium Bulk Terminals at Longview — the under-utilization of existing coal ports could mean less demand for the new facilities. Price is the key, Sanzillo said; the price of global thermal coal has dropped from $132 per ton in 2011 to about $60 per ton today. “The global market is, in short, in a state of oversupply,” he added.
Despite the declining market, coal-export terminals in British Columbia have actually expanded in the past two years, adding more capacity although much of it is under-utilized. Vancouver-area terminals are in direct competition with Gateway Pacific and have been shipping some American coal for several years.
The China market, the primary driver of the coal-export market, has slowed in the past two years, and Sanzillo noted that a Chinese tariff on coal imports will hurt American exporters, as China strives to support its domestic mining industry.
Sanzillo called attention to financial pressures facing two players in the Northwest, Arch Coal and Ambre Energy, both of which are highly leveraged; even Peabody Coal, the industry giant, is cutting costs and expects a year-end loss. The other major player in the region, Cloud Peak Energy is “facing losses on its exports for the first time in its history and has stayed profitable through hedging.” Sightline’s Clark Williams-Derry also reported on this development.
The financial picture painted by Sanzillo is based heavily on data from the industry and industry publications and is certainly no surprise to the industry itself, although industry leaders will likely dispute his conclusions about the future demand and the value of investing in new coal export capacity.
Craig Cole, speaking for Gateway Pacific, did just that: “Although based in Washington, SSA Marine is a sophisticated investor with worldwide experience. No one is more focused on forecasting market demand than the private investor putting up the money, in this case over $600 million,” Cole said.
“Under today’s strict environmental laws, the taxpayer is not stuck with the bill if things don’t work out. Advocacy research, like that being presented by Mr. Sanzillo, is not objective research.”
Referencing data from the U.S. Energy Information Administration, Cole noted that the agency projects that energy consumption worldwide will increase 56 percent by 2040. That is, of course, a very long-range projection — and to get to 2040, American coal companies will need to survive through the next decade.
The market has softened, that is beyond dispute; the question is the impact over the long run, which is the rationale for the building of very large and expensive projects. Terminals in Washington and Oregon are based on Powder River Basin coal from Wyoming and Montana and shipping costs are a major determinant as they compete with Australia, Indonesia and other mines closer to the Asian market.
There is much to be determined in the next several years, not the least of which is action to combat climate change. The U.S.-China agreement recently issued by President Obama and President Xi is a direct challenge to additional burning of coal. But the pledge is not law yet in either nation, and Republican control of Congress and the Washington state Senate puts advocates for the fossil-fuels industry in key positions.
Standing just outside the debate are more aggressive proposals from agencies with some status, in particular the International Energy Agency, established by major capitalist nations during the 1973 oil embargo to monitor global energy trends. The IEA has called for leaving a third of proven reserves of fossil fuels in the ground to combat global warming. The proposal, as described by Bloomberg Businessweek, has yet to gain traction among the major economic powers, but would “invalidate the business plans of some of the richest and most powerful enterprises in history: the international oil companies.” Coal companies would be in the same company.
Coal is a gamble; as Gateway Pacific’s Cole said in his response, “Market risk is always a part of the investment calculation.” Without doubt, Peabody and other industry giants have teams working on that calculation, as do developers of export terminals.
Sanzillo and his counterparts in Climate Solutions and Sightline hope to influence how investors and public agencies calculate that market risk.
