The coal industry has suffered dramatically in the last few years. For example, since January 2011, the Newcastle Free On-Board export price, which is the key benchmark mechanism for the Pacific markets, has lost more than half its value. In the last 12 months it has dropped by 25%.

This has resulted in numerous bankruptcies in the US coal mining sector, with many more operating at a financial loss. Between the beginning of 2012 and June 2014, more than 25 US coal producers filed for bankruptcy (with two of those possessing assets in excess of $1bn), and 11 producers have replaced a senior management executive. Elsewhere, major global miners like Rio Tinto and BHP Billiton have steadily been reducing the proportion of thermal coal assets in their production portfolios.

Environmental Regulation

Environmental legislation has hampered the coal industry recently. In June 2014, the US Environmental Protection Agency (EPA) initiated the Clean Power Plan to reduce carbon-based pollution from power plants. The EPA has assessed that power plants account for almost one third of all domestic emissions from greenhouse gases and are the dominant source of carbon pollution in the country.

The Clean Power Plan aims to reduce carbon emissions generated by the power sector so that such emissions in 2030 are 30% lower than 2005 levels. This has put big constraints on coal, which is losing its share in total US electricity generation. In the year ended September 2014, coal stocks intended for power generation declined by 18.4%.

Fund Divestment From Coal

2014 also saw substantial action from investment funds to divest from coal, among other fossil fuels, in a bid to mitigate climate change; over 800 institutions and more than $50bn of assets committed for the divestment. Norway’s largest pension fund, which is worth $70bn, announced in November 2014 that it will remove companies generating over half of their revenue from coal-based activities. Other notable divestments include Local Government Super, Australia’s biggest public sector pension scheme; AP2, among Sweden’s biggest pension funds; and the Rockefeller Foundation.

The Institute for Energy Economics and Financial Analysis in May 2014 also made a compelling case for the $300bn New York State and City public pension funds to divest from coal miners. It concludes that a US portfolio of coal stocks, including major players such as Peabody Energy and Arch Coal, has fallen by 61% since 2011 with Peabody, the world’s largest coal company in the private sector, losing almost three-quarters of its value. Cost-cutting measures and asset sales have not been enough to change the circumstances of these coal companies as their balance sheets continue to deteriorate. Furthermore, export markets have become unfavourable as China looks to cut back on the use of coal.

2013 year-end financial results showed operating losses for Arch and Peabody, with Peabody’s EBITDA declining by 40%. A loss of coal’s market share to natural gas in particular, but also to renewable energy and an improved level of energy efficiency, is the principal reason cited for this downward spiral. The shale gas revolution has caused natural gas prices to more than halve, which has made utilities opt for gas-fired generation as a more economically viable and cleaner option, at the expense of coal.

Nonetheless, a few coal companies have exhibited growth over this period, such as Alliance Resource Partners and Westmoreland, which have acquired some of the lowest-cost coal reserves in the US, for example in Illinois and Appalachia. Illinois Basin coal in particular is still proving to be viable for Alliance – although it contains high sulphur, it is relatively cheap and is in demand from power plants, which now mostly have scrubbers installed to remove the sulphur. Alliance has some upcoming projects that are expected to yield an estimated total production increase of 29% by 2016.

Industry Outlook

Bernstein Research, in a September 2014 coal sector research paper, estimates that by 2020 the use of coal by power plants in the US will decline by over 200 million metric tonnes, approximately 25% of the 2013 figure. This drop is mainly attributed to the closure of existing capacity.

The coal industry has historically been pro-cyclical – as the US economy has grown, coal production and prices have followed suit. The divorce in this relationship during the US economy’s most recent recovery implies there is less of a reliance on coal these days. With more shale gas discoveries expected on the horizon and further fund divestment from fossil fuels penned in for 2015, the future of the coal industry looks ominous.