Tue, March 13, 2018 9:04 am
American Coal Council Spring Coal Forum Conference Recap: DTC’s Tracy Green attended the ACC’s Spring Coal Forum in Clearwater, FL last week. Despite attendance being down YoY, the mood was lively with many attendees enjoying the sun and sand with their families. Much of the chatter revolved around coal industry news following the Polar Vortex 2018 and refreshing support from the current administration for the coal industry, while many of the speakers focused on policy changes in addition to the growth in renewables and the implications for coal. Below are key takeaways:
- Grant Quasha/Paringa Resources Opens Conference: CEO Quasha discussed coal’s production decline from 1.2 bln tons in 2008 to just over 700 mm tons in 2017―a CAGR of negative six percent. He noted the capital market capitalization for all public US coal companies totals only around $12 bln, making the entire industries’ value less than a few unknown tech titans. While he noted the seemingly dim outlook for coal, with headwinds including natgas competition, unfettered government regulation and subsidies for renewables, Quasha offered solace with his expectation for growth. He expects thermal demand growth driven by renewed economic activity along with recent support for investments in US infrastructure. With the announcement of Section 232, Quasha also anticipates industrial power demand to grow from possible restarts to include Century Aluminum’s Hawesville, KY plant (600 MW of demand), expansion of Big River’s EAF ops (450 MW of demand), US Steel’s Granite City Blast Furnace and maybe AK Steel’s ops at Ashland.
- Cost of Renewables in the US: Grant Quasha/Paringa Resources stated in 2013 wind received nearly $6 bln and solar received $4.4 bln, totaling over $10.3 bln in federal tax subsidies or about 10x the amount of federal support coal received. On a level playing field ($/MWh), wind and solar get 400x more federal support for every MWh produced by solar. The US taxpayer paid $231 in renewable subsidies but only $0.57 for the same unit in coal. Quasha also noted that for each one percent increase in solar and wind’s share of generation globally (which is expected to hit 3.6% by 2040), the world will spend approx. $150 bln in subsidies alone. On the other hand, Wade Schauer/Wood Mackenzie commented that global renewable generation, while expensive initially, is becoming more competitive, even without subsidies at a levelized cost. He cited bid pricing around the world showing lower costs for solar and wind were “unmasked” by the industry moving towards a competitive auction approach.
- Importance of Fuel Diversity and Coal Generation: Multiple speakers focused on how the Polar Vortex 2018 over the New Year highlighted the importance of fuel diversity in the power mix, and, in particular, coal to grid resiliency when renewable and natural gas generation fails. Schauer showed that during the Polar Vortex 2018, nuclear and coal represented 30% and 40%, respectively, of the PJM fuel mix as high gas prices made coal even more economic in the Marcellus/Utica area. Terry Jarrett/Healy Law Offices pointed out that New England closed down their coal plants to rely on natgas for baseload generation, but they do not have the gas line infrastructure to support heavy winter demand as seen when fuel oil, which is more polluting than coal, was used as a back-up for generation. Australia and Germany both serve as cautionary tales after they closed coal-fired generation in favor of renewables resulting in severe reliability issues, negative pricing and rising electricity prices. The common theme among the presentations was coal’s competitive value stems from its reliability and cost. Renewables come with high cost for little reliability, and while natural gas is currently cheaper, its price over time is volatile. Quasha stated unconventional drilling has lowered gas recovery costs, but increasing exports and growing decline curves from unconventional production may affect natgas’ sustainability. Also, on the reliability front, natgas is not truly “baseload” due to the need for constant connection to pipeline, little to no onsite storage, a subjection to price spikes and the possibility for outages that do not affect coal plants.
- Improvements in Financial Health Across the Coal Sector: Increased levels in met producer stock prices have been driven by earnings from met coal sales and investor enthusiasm. For thermal coal, stock prices are not faring as well and remaining relatively flat. Joe Aldina/S&P Global Platts noted that the met coal sector has become more fragmented, especially in CAPP, with smaller companies picking up more assets and reserves from the larger coal producers, while the ILB has become more consolidated with Murray Energy, Peabody and Alliance Coal controlling more than three-quarters of the market with the ability to further stabilize production. The majority of new or expanding coal mine developments are on the met coal side throughout NAPP and CAPP with only two thermal coal mine developments in the ILB, but the majority of producers are using their cash to pay out dividends instead of capital expenditures.
- Steel Demand and Production Outlook: Steel production has more than doubled from 800 mm MT in 2000 to 1.6 bln MT in 2017 and further demand will be primarily driven by China, followed by India, the Atlantic Basin and the US. In China, EAF technology produces about 6.5% of China’s steel production, which was nearly 832 mm MT in 2017. Bill McFadden/Robindale Energy noted that iron imports into China were over one bln MT vs the 70 mm MT of met coal or about a quarter of the seaborne trade. Another important driver for met coal will be India in the medium and long term as they strive to ramp up steel production to 300 mm MT, indicating seaborne met coal demand to increase to 73 mm MT by 2028. Steel production in the Atlantic Basic is about 300 mm MT, which requires about 90 mm MT of imported met coal. As for the US, historically, US steel shipments have been volatile due to global steel overcapacity and the level of imports into the US, which has led to US tariffs, such as Section 232.
- Impact to Met Coal: McFadden noted that the current supply demand balance is good news for met coal producers in the short and medium terms with China staying steady at 75 mm MT, steady met coal import growth in India, with imports remaining steady for Atlantic Basin. The prices are viewed as demand-driven with good fundamentals to support a good pricing environment. He noted a thesis that the marginal cost and price floor for quality met coal to be $140 for supplies delivered to Chinese coastal coke plants. He also commented that they are seeing more international buyers interested in fixed pricing as a hedge against price volatility by supply disruptions in Australia.
- Policy and Regulation Reform Efforts: Under the new administration, policy and regulation is seeing a shift in support for the President’s goal for “energy dominance”.
- Region Consolidation for the Department of Interior to Streamline Permitting Process: In the first year of the current administration, the Federal coal leasing moratorium was lifted, the royalty validation rule was repealed and the Interior’s policies reexamined. A major goal now is to reduce the time it takes to get through the National Environmental Policy Act (NEPA) process from an average of four years to one year along with a budget that also includes an increase in funding for BLM to improve the federal coal leasing and permit processing. Todd Wynn/Department of the Interior highlighted the complex and convoluted federal agency jurisdictions and boundaries that lengthen the permitting time under NEPA. The new administration is requiring the agencies to submit a reorganization plan. The current draft consolidates jurisdiction into 13 major regions, but is still under review. The reorganization is expected to help the coal industry by improving inter-bureau coordination at the proposed regional level, away from D.C, under a regional director, which should result in faster decision making with less DC bureaucracy.
- Tax Act of 2017: For the coal industry, the benefits of the Tax Act of 2017 were 100% immediate expensing, lower corporate tax rates, elimination of the Alternative Minimum Tax, and expansion of credits for fossil fuels, freeing up money for businesses and consumers to invest in areas to stimulate growth. One of the key provisions of the Tax Act of 2017 was the corporate tax rate being reduced from 35% to 21% in order to increase the US’s competitiveness worldwide against countries who have lower tax rates (25% average for OECD countries. Other key provisions include the removal of the worldwide tax system (companies are no longer taxed on their worldwide income) and the imposition of a one-time tax on overseas earnings. Another goal was to simplify the domestic corporate tax system with the elimination of the corporate alternative minimum tax permanently. To encourage economic growth, a provision to write off the full cost of capital expenditures immediately was provided, with an exception for public utility property, which are excluded from the write-off and, in exchange, net interest expense deduction limitations do not apply. Lastly, the tax reform promotes equity financing over debt financing by limiting companies to interest expense of 30% of their adjusted taxable income. The Carbon Sequestration Tax Credit rate was also increased by up to $50/ton that is stored, and up to $35/ton that is utilized.
- EPA and Clean Power Plan (CPP): The CPP represented the previous administration’s efforts to shift power generation from coal to natural gas to renewables. A proposed replacement will likely focus on heat rate improvements through either a menu of options or with efficient operation based on best operation and maintenance practices with States to set unit-specific standards with more flexibility. EPA Secretary Scott Pruitt is making New Source reform a top priority with 4 “key initiatives”, which give guidance to clarifying emissions test and establish a “substantially related” test for project aggregation.