Analysis: U.S. coal companies struggle to cash in on Europe crunch

Alpha Metallurgical Resources

17/05/2022 12:00

By Timothy Gardner
    WASHINGTON, May 17 (Reuters) - U.S. coal producers are
seeking to boost exports to cash in on soaring prices since
Russia's invasion of Ukraine but face big headwinds including
shipping bottlenecks, labor shortages, and a dismal long-term
outlook discouraging investments in new mines.
    The outlook means the United States, which holds the world’s
biggest reserves of coal, is unlikely to play a major role in
international efforts to expand shipments of the fuel to Europe
ahead of an expected European Union ban on Russian imports this
August to punish Moscow for the invasion.
    It also means the rally in global coal prices is unlikely to
pull the U.S. coal industry out of a more than decade-long
tailspin driven by federal and state efforts to slash carbon
emissions that have led utilities to replace coal with
cleaner-burning natural gas, and solar and wind power. U.S.
President Joe Biden has set a goal to decarbonize the U.S. power
grid by 2035 to fight climate change.
    "The ability of U.S. companies to respond (to the price
rally) has been limited by logistics challenges, like most
industrial activity at the moment," said Ted O'Brien, managing
partner and chief commercial officer at Oluma Resources, a
Pittsburgh-based marketer of the fuel, citing clogged railroads,
labor shortages and the availability of new equipment.
    Ernie Thrasher, chief executive of Xcoal Energy & Resources,
a coal marketer, estimated that bans on Russian coal could
remove 114 million tons a year from global markets, but that the
United States would be poised to fill less than a tenth of that
given the lack of investment in the U.S. industry. 
    “That's really the issue," said Thrasher. "There's been
virtually no capital invested in the industry since 2015," he
said adding Europe was likely to rely most heavily on other
countries like Colombia, Indonesia, South Africa, and Australia
to replace Russian coal.
    U.S. coal production year-to-date is up 3.8% from the same
period in 2021 at about 203.7 million short tons, according to
the latest data from the Energy Information Administration,
marking a slight recovery from the depths of the COVID-19
pandemic when output hit the lowest level since 1965. 
    But exports have not kept up. Shipments of U.S. coal abroad
in the first quarter of 2022 slipped about 2.5% year-on-year to
about 20.2 million tons, the EIA said. And the logistics hurdles
prompted the EIA to lower its 2022 U.S. coal export forecast to
85.7 million tons, down about 3.7% from its previous prediction
in April. 
    The EIA said U.S. exports are expected to rebound about 3.6%
in 2023 to 88.8 million tons.
    
    NOT WHAT SHAREHOLDERS WANT 
    One company that expects its exports to do well is Alliance
Resource Partners  ARLP.O , which has mines from Illinois to
West Virginia. President and CEO Joe Craft sees the war driving
U.S. export prices for both thermal coal burned in power plants
and metallurgical coal used to make steel higher than prices for
domestic coal for at least 18 months.
    As a result, Alliance's export volumes should be more than 6
million tons this year, up from about 4 million tons last year,
and most likely will grow by an additional 1.5 million tons in
2023, Craft said in a first quarter earnings call this month.
    But an industry-wide expansion of exports is unlikely to
happen quickly as few companies have new mines coming and most
new investments are going toward sustaining output from aging
facilities, said O'Brien of Oluma.
    Arch Resources Inc  ARCH.N  does not anticipate investing in
new mines for thermal coal, CEO and President Paul Lang said
during the No. 2 U.S. coal supplier's earnings call last month.
    "I think we'll continue to generate cash out of these
assets, but we're simply not going to put any more cash into
them," Lang said. "It's not what our shareholders want and I
don't think it's a good investment for us." 
    Top U.S. coal producer Peabody Energy Corp  BTU.N  and other
big miners Alliance, Arch and Alpha Metallurgical Resources Inc
 AMR.N  did not respond to requests for comment for this story.
    The National Mining Association industry group said the
supply chain problems with rail, the primary means of
transporting coal, is costing companies both in lost shipments
and extra labor. 
    "Mining companies are facing enormous difficulties getting
coal to the consumer," Katie Mills, an NMA lawyer, said late
last month in testimony to the Surface Transportation Board.
    NMA spokesperson Ashley Burke told Reuters that the industry
was “ramping up as much as possible” to supply European buyers,
but faced “limits to what the rail transport and ports can
handle.”

 (Reporting by Timothy Gardner, editing by Richard Valdmanis and
Marguerita Choy)
 ((timothy.gardner@thomsonreuters.com; +1 202 380-8348 (Twitter
@timogard); Reuters Messaging:
timothy.gardner.thomsonreuters.com@reuters.net))