Three years ago, coal was hot.
Stoked by insatiable coal-fired Chinese power plants, international demand boomed. Prices soared. Phones rang frequently at Oregon and Washington ports. On the other end? Eager investors hoping to snatch up land to build export terminals to quench Asian demand.
How things have changed.
Today, coal prices have slumped. Exports have shrunk. Three coal terminals proposed in the Pacific Northwest have been abandoned. And industry analysts say the three that remain look precarious.
Asia was supposed to be the next frontier for U.S. coal producers, a glimmer of hope for a sinking industry. But the market is shifting underfoot, calling the terminals’ profitability into question. For investors, they’ve become bets that markets will bounce back.
“Certainly, higher prices globally are supportive of these investments,” said Richard Morse, managing director at SuperCritical Capital, an energy finance consulting firm. “To the extent we don’t have higher prices, it’s harder to make these work. U.S. exporters will have a harder time competing with lower-cost international competitors.”
Plans to build terminals near St. Helens, Boardman and Longview and Bellingham, Wash., pit familiar foes: Big business offering investments, jobs and taxes to depressed rural communities, versus the environmental lobby and ethos of the Northwest.
This time it’s a conflict writ large: Oregon and Washington face becoming a conduit for global warming pollution in Asia when they are phasing out coal plants to reduce emissions at home.
Right now, even proponents say the business case is thin.
In June, an executive with Ambre Energy, an Australian company that has proposed two coal terminals in the Northwest, said one of the projects would struggle to make a profit at current prices.
“We could break even at best,” said the executive, Clark Moseley, according to a trade magazine’s account.
Moseley, who is leading Ambre’s effort to barge up to 8.8 million tons of coal annually down the Columbia River from Boardman to Port Westward, told The Oregonian he believes coal prices have stopped dropping. Asian prices have inched up from summer lows but are still 37 percent below January 2011 highs.
“Will prices move up? Possibly so,” Moseley said. “Will they go down any more? Probably not.”
The companies proposing coal exports believe markets will turn around as they wind through long permitting processes. They expect Asia to choose coal to meet growing electricity needs, driving international demand.
“Energy markets have shortterm market fluctuations,” said Ken Miller, CEO of Ambre’s Millennium Bulk Terminals project in Longview, Wash. “Coal suppliers the world over see continued growth of coal consumption in Asia and they are developing port facilities to meet that demand.”
Still, some analysts are skeptical that coal will rebound soon. A Nov. 18 Deutsche Bank report warned that coal prices won’t bottom until mid-2014. A July 24 Goldman Sachs report concluded that “the window for profitable investment in coal mining is closing.”
The Powder River basin, which stretches across the Montana- Wyoming border, holds major coal deposits. Companies say the area’s coal is attractive to Asian buyers. It’s some of the world’s cheapest to extract. And it’s low in polluting sulfur.
But shipping costs are a disadvantage. U.S. companies face strong competition from suppliers like Australia and Indonesia that are closer to big buyers like China.
The United States has historically been a swing exporter. When prices were high, U.S. producers profitably exported because buyers were willing to cover the costs of extracting and shipping coal. But when prices drop, the U.S. supply becomes less attractive and buyers turn elsewhere.
“The international price matters,” said Kristoffer Inton, a Morningstar analyst who follows the coal industry. “There are a lot of other places that can supply coal.”
This isn’t the first time the West Coast has tried to play in the international market. Coal terminals to serve Asia were built in Portland in the 1980s and Los Angeles in the 1990s. But when markets turned sour, both went belly up.
Industry watchers say the latest wave of West Coast export terminals have long-term value for companies, even if they wouldn’t be profitable today. They give producers the capacity to export coal when markets are favorable, said Seth Schwartz, president of Energy Ventures Analysis, an industry consultant.
“Compared to two years ago, it’s marginally economic,” Schwartz said. “But that doesn’t mean they aren’t going to go ahead with the terminals. They know prices can go up and down. They realize the value of having the option, even if it’s not economic in some years to use.”
Asian demand for U.S. coal is forecast at the end of the decade by Wood Mackenzie, a global consulting firm. It expects demand there to overwhelm Australian and Indonesian suppliers by 2018 or 2019.
Jonny Sultoon, a coal markets analyst for Wood Mackenzie, said Ambre’s Port of Morrow project at Boardman has the best chance of meeting that demand. “Additional supply is needed to plug that market,” he said.
The Morrow proposal, which would start with 3.9 million tons of capacity and potentially grow to 8.8 million, is smaller than terminals proposed in Longview, Wash. (48.5 million tons) and outside Bellingham, Wash. (52.9 million tons), giving it an easier federal permitting hurdle to clear.
Sultoon said the Morrow project is more likely to find buyers in South Korea and Japan willing to pay slightly more for reliable, lowsulfur U.S. coal to diversify against volatility and supply interruptions from other suppliers.
Ambre Energy has agreements to sell coal to two utilities in South Korea, a country that already buys Powder River basin coal exported through British Columbia. But Ambre has had trouble raising money. It recently abandoned plans for a coal export terminal in Texas, citing the market.
China, the world’s largest coal consumer, looms large for the other export proposals. Chinese coal imports exploded in 2009, driving the global surge in prices. But the country has extensive internal supplies and has invested heavily in infrastructure to resolve bottlenecks that led it to import.
“The difficulty if you’re looking at a 25-million to 30-million ton project, who are you going to sign those contracts with?” Sultoon asked. “To get that kind of volume upside, you need participation from Chinese buyers. It’s going to be quite hard to get those kinds of agreements set up.”
It’s easier to find one or two small buyers willing to pay a premium for U.S. coal, he said, than commitments from several major buyers needed to make a big project viable.
Major coal producers aren’t expecting the larger Longview and Bellingham terminals to be ready soon. Colin Marshall, president and CEO of Cloud Peak Energy, a large U.S. coal company with an option to ship through the Bellingham-area terminal, said in October that 2018 isn’t a realistic goal.
“So 2018 you’d be an optimist,” he told analysts in a conference call, “but sometime after then we still believe that the merits of the port, if they’re actually given a fair hearing, will come through.”