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Hogsback on the death of the US coal industry

IS the death of the US coal industry good or a bad? That's a question which Hogsback has been con...

Staff Reporter

The failure of Arch, under the weight of high debt levels, low coal prices, plus competition from natural gas in the electricity-generating market, means its name can be added to the roll call of earlier coal collapses, including Patriot Coal, Walter Energy and Alpha Natural Resources.

People pleased with Arch slipping into the US version of court-ordered protection from its creditors include the environmental movement and the US Government, especially President, Barak Obama, who has made coal his No.1 industrial elimination target.

Oddly, there are also people in the coal industry in other countries who are just as pleased with the death-spiral of US coal.

The obvious reason for welcoming the collapse of Arch and other US coal companies is that it means reduced competition in export markets, though that is probably a decline driven more by the high value of the US dollar which renders coal exports from that country a marginal proposition.

Another reason for applauding the withdrawal of US companies from coal production, for whatever reason, is that the industry will become a smaller target for environmentalists and that means less negative publicity seeping into the international arena from a vigorous and very loud US protest movement.

There are other factors to consider as the US coal industry stumbles from crisis to crisis, some good and some bad, but the key point observed by The Hog is that what’s happening over there is really just another period of change which effects all industries from time-to-time.

Coal in the US remains a big, though fading industry, largely because a lot of it has become uncompetitive for multiple reasons, including toughening government regulations and competition from other fossil fuels and alternative energy.

Managing the meltdown of US coal is not easy and not pleasant for people involved. An estimated 40,000 jobs have disappeared and investors have been scorched.

But what’s happening in the US is not what’s happening elsewhere in the world where coal continues to compete strongly for its share of the power generation market while remaining the go-to fuel for steel production.

A number of recent developments have reinforced a view that what’s happening to coal is actually nothing special because it’s a process which has been seen in many other industries where falling prices and tighter regulation has rendered some producers unprofitable.

And in that last word lies the key to future: profitability.

US coal, like US steel of a few decades ago, has been plunged into a crisis because of changing market conditions, and that includes changing government regulation, competition and the quality of what’s being produced.

There was no big push to shut down US steel, it just happened over time as what was once that country’s biggest industry faded to a much smaller business based on specialist mini-mills rather than huge blast furnaces.

Coal is on the same journey as steel with a contraction back to fewer producers able to deliver high-quality material into a more competitive market, with very little material reaching export markets.

There are lessons in what’s happening to US coal for other countries, including the need to focus on product quality, as well as costs and market selection.

Quality is a natural advantage of Australian coal which is why exports continue to rise, with the aid of a more competitive currency.

Costs are coming down, but will need to stay down, and market selection will become increasingly important as China tightens its quality rules and India rushes to modernise, which means India is fast becoming the top priority for Australian coal.

There is another important factor at work and that’s the cyclical nature of any industry which has to adjust to the changing dynamics of economic forces, especially supply and demand.

In the US, demand is falling but suppliers have been too slow to react to the change with predictably painful results.

In Australia, supply has been too strong for demand, the main reason for mine closures and job losses as mining companies try to match their output with what customers need.

Importantly, there is nothing new in what’s happening because it has been seen countless times before to other industries hit by changing market conditions.

In time, US coal will find a balance between supply and demand. It will not simply disappear.

The same will happen in Australia as local mines adjust to changing market conditions, both positive (Indian demand the decline of US exports) and negative (regulation and excess supply) with the end result being a more efficient and hopefully more profitable industry.

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