We’ve been hearing a lot about the rapid decay of Detroit, but we’re seeing the same amount of devastation and ruin out in coal country. Small towns that once flourished around the country have been reduced to mere skeletal frames. In some towns, coal mines were the only source of employment – jobs that were passed down from generation to generation.
Detroit lost a quarter of its population over the years, but we’re seeing coal towns that have been entirely abandoned. Take, for instance, the small town of Thurmond, West Virginia – a small town that went from 500 in the 1930s to just five!
While a major city like Detroit cannot compare to small towns built around coal, it is a sign of coal’s impending demise. And I predict there will be more coal towns that will begin dying, especially larger towns that live on thermal coal.
But the American coal industry is in better shape than other parts of the world. Take northern China for instance, where the cities of Ordos and Shenmu were once two of the wealthiest Chinese cities because of coal. Shenmu is on the verge of civil unrest because of slumping coal prices and government regulations.
Private lenders in China are beginning to pull out because the situation is perceived to be unstable, and the government is focusing on revamping its coal industry to reduce urban pollution.
It’s a simple fact that the world is slowly moving away from coal.
President Obama announced in June that he would no longer finance overseas plants through the U.S. Export-Import Bank. And international banks like the World Bank and the European Investment Bank are also withdrawing financial support for coal plants worldwide. You can look to private lenders, but even they are nervous about the potential closings of coal plants and mines internationally.
In Australia alone, over 11,000 coal workers have been laid off as a result of lowering demand and employers cutting back on costs. Coal mines in South Africa and Indonesia are going through the same fate.
Coal is simply failing to compete against lower natural gas prices and cleaner renewable energy.
And if you think developing nations across Asia and Africa will prop up the coal industry, then I have bad news for you. Organizations like the World Bank are encouraging emerging economies to rely on natural gas instead of coal.
This will have a vast impact on coal in developing economies, since these nations have heavy dealings with the World Bank and other Western lenders.
Not All Bad
But here is the good news for coal.
While Western banks are slowly closing the door on coal, other export-credit agencies from China and Japan may step in to fill the credit-lending void for coal miners. Japan’s Bank for International Cooperation has given $10 billion in support for coal endeavors worldwide.
And you know about the growing influence of China around the world.
Chinese credit-exporting agencies will be another way the nation will gain influence in developing economies across the rest of Asia and Africa.
The fact is that U.S. foreign policy in Africa and developing parts of Asia is sorely outdated. China has already gained a significant amount of influence in emerging countries through trade and humanitarian aid. Japan and China have dedicated billions of dollars to economic development in Africa, with billions more in funding coming in the near future.
Coal will be another tool with which China can extend its influence abroad.
Japan is the second largest importer of coal, with China first in place, after the island-nation decommissioned most of its nuclear reactors. However, Japan is looking to shift away from oil and coal resources, with an over-arching focus on renewable energy.
China will be the main player when it comes to coal.
The Middle Kingdom is still the largest consumer of coal in the world and has exported coal technology abroad. China also has roughly 15 percent of the world’s coal resources. And there are definitive talks that China will increase financial support abroad for the coal industry.
Along with China, India’s coal imports have risen on a year-to-year pace of 15 percent to supply more power to urban centers and homes.
Currently, there are over 1,200 coal-based projects in the works, with three-quarters of them in China and India. If all were done and built tomorrow, they would add 80 percent electrical output to the world.
Coal currently comprises 40 percent of the world’s power source. It may be on the decline, but it still has a formidable presence worldwide.
But what companies will be most affected by the current slump?
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Miners at Risk
Peabody Energy (NYSE: BTU) had shut down 11 mines in New South Wales and Queensland. BHP Billiton (NYSE: BTU) has also been severely affected. Between BHP Billiton and Rio Tinto (NYSE: RIO) mines, coal activity increased 320 percent until 2005. But Rio has also had to put $3 billion worth of coal assets up for sale. Glencoe Xstrata (LON: GLEN) has scrapped plans for a $1 billion export facility in Australia.
It was once thought these coal giants could still churn a profit while coal prices were high, but now this looks uncertain.
Coal prices in New South Wales and Queensland had dropped from $36.25 to $13.05 in the last few months.
BHP had to close down two major mines and cut away $800 million in costs.
And the price of thermal coal dropped 30 percent in the last couple years to just $80 per ton. Coking coal for steel-forging also slumped 50 percent to $145 per ton.
Coal is essentially in the same position as natural gas; with prices being so low, energy producers have had to cut costs and reduce exploration. However, natural gas has the advantage, since it is a clean-burning source.
The coal industry has failed to adapt to a changing world that places emphasis on reducing pollution and greenhouse gas emissions.
New technologies are being developed allowing producers to generate heat from coal while reducing emissions, but it will be a long time before these methods are adopted.
Bet let’s get back to India.
India will be the world’s top importer by 2014. BHP may not be doing well in Australia, but it – along with Adaro Energy (OTCMKTS: ADOOY) – could benefit from a $69 billion trade deal with India.
India’s natural gas field is not faring well when stacked up against coal.
While other countries are focused on natural gas and renewable technology, there are still nations investing in coal, including some in Europe.
The states of West Virginia and Kentucky may be in for a rough patch as coal declines, but business is still booming in some parts, since Europe is increasing the amount of coal imports to provide cheaper energy. Still, this may be fleeting as the EU gears up to introduce new environmental restrictions.
While coal is on the downturn, there are some saving graces that can maintain coal’s presence in the future.
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