Headwinds or tailwinds?
The ever volatile and controversial coal mining industry in the United States continues to ebb and flow - with more flow than ebb in 2018. But does the coal industry now truly have tailwinds behind it, or do those persistent headwinds remain?
There is no question that the agenda of the Trump administration continues to be pro-mining and has led to industry improvement in certain areas, such as the reduced cost of regulatory compliance. Many legislative and executive changes were made in the first six months of office to positively impact US miners, through regulatory relief such as the voiding of the Stream Protection Rule and Resource Management Planning 2.0 Rule. However, a year later it must be said that there is still a great deal of uncertainty about the long term prospects for this industry in the US.
The US coal industry has mostly completed its “restructuring” period following the debt problems that plagued the industry in 2012 and 2013, with the financial health of the large producers on much stronger footing and a large part of the consolidation complete. However, we still see room for further consolidation, leaving a leaner and healthier industry, albeit with a smaller pool of insurance buyers in the market.
However, outside social pressures continue to mount, specifically for thermal coal producers that are outside of the control of regulatory policy, such as the “Unfriend Coal” movement and other Non-Governmental Organizations (“NGOs”) whose activities are targeting the mine permitting process.
The “Unfriend Coal” movement has proven to be a further thorn in the side of insurance buyers in the coal sector and has a direct impact on thermal coal producers. This is a movement that spawned from the Paris Agreements to reduce global greenhouse gas emissions and limit temperature rises to below 2 degrees Celsius. As discussed elsewhere in this Review, this movement has largely found success with European insurers such as Allianz, Swiss Re, Zurich, SCOR, AXA and, most recently, Munich Re. These and other insurers have taken varying stances on insuring thermal coal producers and end users, with some vowing to completely exit the sector by 2019 and it has impacts on large global miners and US producers alike. However, we have found that what is being said at the top of these organizations, and what is happening on the ground, isn’t quite in lock step.
Meanwhile, major US insurers such as Berkshire Hathaway, AIG, Chubb and Liberty Mutual, continue to remain silent. While there is sufficient Property capacity to withstand several withdrawals, the US Casualty market, particularly primary and umbrella, does not have the abundance of capacity that is available to the Property sector. The risk at this point is that the pressure to exit thermal coal will be further applied to US insurers in the future and potentially trigger a domino effect on other insurers and other types of mining. The Willis Towers Watson global mining team is in constant communication with our colleagues and clients on this issue to ensure we keep the clients ahead of any detrimental impacts to their programs and that optionality is maintained.
Furthermore, the NGOs have increasingly become technically savvy, at times attacking the mines at their source, the permits to mine. We have seen circumstances where NGO forensic teams have been legally challenging regulators on permits issued on the backs of what they deem insufficient Environmental Impact Reviews. In some cases, this has resulted in suspensions and delays in what was otherwise a clear mining permit.
In addition, the Trump administration continues to undergo constant change; most recently, the head of the Environmental Protection Agency (EPA) Scott Pruitt was replaced by a new acting head of EPA, Andrew K. Wheeler, his former deputy. However, Mr. Wheeler is a consummate Washington insider, a believer in undoing some of the existing environmental regulation and may prove better prepared to make an impact, though a long term successor is yet to be chosen.
We have not seen utilities make changes to their long term asset retirement plans yet; given the uncertainty around President Trump’s prospects for a second term, this may be of key significance to the coal industry as it will ultimately be the driver for the long term success of US thermal coal producers. Change is still needed on the regulatory front to allow coal fired power producers to make the needed investments to extend the life of the existing coal fired units now in operation.
Though the total coal consumption from US producers is trending downwards by a further 5% in 2018 to a total of about 772 million short tons, it can be seen from Figure 1 below that it remains nearly 30% of our US electricity generation with few signs of material deterioration in the short to mid-term.
Fig 1 – US electricity generation/coal production and consumption, 2016-17
Sources: EIA Short Term Energy Outlook (June 2018 release)
Fig 2 – cumulative installed coal capacity increase, 2013 – 2022 (E)
Source: Citi Research
Fig 3 – world seaborne thermal coal demand (mm MT)
Sources: IHS, Global MT
However, a bright spot has been the thermal export market, which has been steadily strengthening in 2018, providing some much needed price improvement in the short term. Despite the headwinds in the US and Canada, globally installed coal capacity has increased significantly in recent years and is set to continue that growth trend for the next five years as per Figure 2.
The long term impacts of President Trump’s administration and further NGO pressures such as “Unfriend Coal” won’t be known for some time, but the next key step to further stabilizing the US coal markets is the next presidential election in 2020. Many of the Obama administration’s regulatory impacts weren’t fully developed until the second term and we expect a similar path with the Trump administration.
Similarly, as shown in Figure 3 above, the world seaborne thermal coal demand curve looks positive, at least through 2021. There also still exists an estimated global coal consumption of well over 5 billion tons, though China accounts for nearly half of this1. While the US domestic market may have some long term challenges, the continued expansion of global market demand will help sustain the industry as a whole, so long as those growth trends continue.
Fred Smith IV heads up Willis Towers Watson's Mining and Metals practice in the United States.
