The American coal industry has collapsed. This is not hyperbole.
In the last few years, at least 28 coal companies have gone bankrupt and 264 mines have closed. The suffering extends from the smallest companies to the behemoths. Those that haven’t gone bankrupt are trading at small fractions of their values of just five years ago, when the U.S. Coal Sector Index stood at $481. On Friday, the index closed below $32, a loss of more than 93 percent in value.
And last week, the largest US coal producer joined the march into bankruptcy court. Peabody Energy, the St. Louis-based coal giant cited “a dramatic drop in the price of metallurgical coal, weakness in the Chinese economy, overproduction of domestic shale gas and ongoing regulatory challenges,” as the reasons for its bankruptcy filing. Peabody joins Arch Coal, Alpha Natural Resources, Walter Energy and Patriot Coal among American coal giants that have filed for bankruptcy in recent months.
In 2009, Peabody’s stock traded at $718 per share. Today, you can pick up a share for 73 cents – a loss of 99.9 percent. Too bad for shareholders. Looks like they’ve lost a bundle. But who else is losing? And how did this all happen?
It isn’t the “war on coal”
Did you notice Peabody’s bankruptcy statement? They blamed the drop in coal prices, weakness in the Chinese economy and too much cheap natural gas. Oh, and yes, they threw in “ongoing regulatory challenges” as a fourth culprit – but only after citing the massive structural changes affecting the coal industry. Here’s the most obvious fact: Natural gas, a cleaner substitute for coal, is very, very cheap. Back in 2008, natural gas ticked above $12 per thousand Btu’s (MMBtu). But in Chicago last week, traders bought and sold gas at $1.92 per MMBtu, a small fraction of the price seven years ago. At these prices, almost nobody is building new coal plants when they could generate electricity with gas, solar or wind.
Sure, you’ll hear candidates for Congress complaining about Obama’s climate initiatives, or EPA regulations. True enough, in the long run, everyone knows that coal will have to start paying its health and environmental costs.
But the politicians seldom mention this fact: The industry is going belly-up BEFORE any of the Administration’s regulatory actions have taken place. The EPA enacted rules a few years ago to make sure coal plants didn’t emit too much mercury pollution that poisons children; but the Supreme Court blocked the rules last year. And the hotly-debated Clean Power Plan, the centerpiece of Obama’s climate program, is also on ice, thanks again to the Supreme Court. Even if the EPA gets the green light, no state will have to submit any plans before 2018.
And yet, the coal industry has already fled en masse to the safety of bankruptcy, long before government action will force them to clean up their act.
Then what happened to these guys?
We don’t minimize the collapse of coal and gas prices worldwide, and the virtual disappearance of Chinese demand. But there’s so much more. First, virtually all the big coal miners layered on mountains of debt to finance enormous acquisitions in recent years. Alpha Natural Resources bought rival Massey Energy for $7 billion. Arch Coal bought International Coal for $3.4 billion. Peabody paid $5.1 billion for MacArthur Coal. And Walter Energy bought Western Coal for $3.3 billion. And what did they get from the feeding frenzy? Lots of coal reserves that few people really want these days. But the debts are coming due, and they simply can’t pay.
Second, the coal industry faces structural changes that have sent bankers and investors packing. The sustained glut of natural gas has encouraged utilities to build gas-fired power plants, a move that locks in the natural gas advantage over coal. In 2013, for example, natural gas represented more than 50 percent of new power generating capacity in the United States. Coal accounted for just 11 percent, putting it a distant third, behind solar (22 percent) and only slightly ahead of wind (8 percent).
And even though coal still has the lion’s share of overall electric generating capacity, U.S. coal-fired power plants are aging, and many are nearing the end of their useful lives. Without new plants, coal demand is destined to plummet. And there are very few new plants.
Third, these changes pale in comparison to the sea change in public thinking. Whether it’s mercury, or greenhouse gases, or sulfur oxides or acid runoff, the American public is waking up to the reality that coal pollution is too expensive for the public to bear in the name of private profits. Whether or not the Clean Power Plan or EPA mercury regulations survive in their current form, no serious observer can imagine a future in which coal plants pollute the world and jeopardize its climate systems, all for the sake of their own profits. In fact, the whole world has confirmed this reality by agreeing to the terms of the Paris Treaty, under which every country will make substantial cuts in climate-warming emissions. Coal, everywhere, will have to remain in the ground.
Uber-financier Goldman Sachs sums up these changes in a brilliant nutshell. They declared in January that it’s time to slowly ease coal out of the energy mix, with a friendly pat on the head for all the good it did for the U.S. economy. “Just as a worker celebrating their 65th birthday can settle into a more sedate lifestyle while they look back on past achievements,” the report noted, “we argue that thermal coal has reached its retirement age.”
So, who picks up the tab?
Bankruptcy is not death. Companies don’t file under Chapter 11 as some sort of final act before breathing their last. They use the courts to gain relief from their obligations to shareholders, creditors, employees, retirees and the public. They can’t afford to pay everything they owe, so the court determines who loses, and by how much. In theory, the rehabilitated companies emerge with a new lease on life. They can’t pay, so others absorb the cost.
In the case of bankrupt coal, who pays?
Well, for starters, you do. Not you alone, mind you. In West Virginia, 120,000 retired miners and their families could lose their pensions and health care – for many their only source of income. But you’re caught in the mix as well. That’s because it costs enormous amounts to clean up the toxic mess that coal mining leaves behind. You’d think that Federal and state governments would compel coal companies to reclaim their strip mines and shattered mountains as they go, but it doesn’t happen that way. In Montana, North Dakota and Wyoming, there are 450 square miles of land torn up by mining; but only 10 percent has been reclaimed.
This means that the coal companies have put off for another day the cost of reclamation. For bankrupt Peabody, the cost is estimated at $1.4 billion. For bankrupt Arch and Alpha, it’s $485 million and $640 million, respectively. And in bankruptcy, they will shed these liabilities for pennies on the dollar. These abandoned wastes cannot be left alone. They’re ugly, yes. But they’re also perpetual sources of water pollution, slowly leaking acidic and otherwise toxic wastes into streams and groundwater supplies.
And so you will pay, as a federal and state taxpayer. For these three companies alone, your share is about $7. Another $7 for your spouse, your mom, each of your kids, your neighbors. Everyone in the country gets to chip in $7 to clean up the mess left behind by just three coal companies. Did I mention that 28 of them are in bankruptcy?
Now, you and I may think that this is scandalous. But actually, this is standard operating procedure for the coal industry. In the best of times, the U.S. coal industry leaves enormous costs for everyone else to pick up – sometimes called “external costs.” These include things like respiratory diseases, toxic mercury levels, ocean acidification, climate-altering greenhouse gas concentrations, and the effects of drought and flooding.
Until 2010, we didn’t really know the scale of these costs. That’s when the U.S. National Academy of Sciences produced a study called The Hidden Cost of Energy: Unpriced Consequences of Energy Production and Use. Its findings were shocking. Coal burned in a single year by U.S. power plants costs everyone else on the planet another $200 to 300 billion in “external costs.” That’s billions, with a “B”. And it amounts to a tax of about $30-40 levied on every human on Earth. Only for U.S. coal. Only for one single year.
So if you’re following the news, watch carefully in the year ahead as the American coal industry winds its way through bankruptcy. When it’s over, you and I will be a bit poorer. But until we summon the resolve to leave coal unburned, all of us will continue to bear enormous external costs, arising not only from coal’s nominal “failure,” but from their normal levels of success.
Isn’t it time we get to work on ways to leave it in the ground?