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The Big Name in Coal's Resurgence: China -- Update

27 Aug 2017 5:59 pm
By Timothy Puko 

China's reemergence as a coal importer has boosted the fortunes of U.S. producers who are now shipping more coal abroad than any time in the last two years.

The trend has helped solidify a business that at the beginning of last year was suffering through a spate of bankruptcies and threatened with more. Revenue at publicly traded U.S. coal companies grew 19% in the first half of this year compared with the same period a year ago, and the biggest gains came at companies helped the most by exports, according to data compiled by Doyle Trading Consultants, a coal-market-analysis firm.

That growth comes at a time when President Donald Trump has vowed to end a long decline in the U.S. coal business. Hundreds of mines have closed in recent years largely because of increasing competition from other fuels, and the Trump administration has pushed to cut regulations that make coal even less competitive.

But market forces, especially China, have a much bigger influence than anything the Trump administration has done, analysts said. While that has worked in the administration's favor so far, it could also overwhelm its deregulation efforts and put the coal industry into retreat if those factors swing back the other way.

"China is 100% the key determinant," said Mark Levin, analyst at Seaport Global Securities LLC. "That's difficult for anyone in the United States to get a clear angle on."

China set the rebound in motion a year ago as global prices and U.S. exports were bottoming out. In the middle of a world-wide glut, China used new environmental rules to limit the number of days its domestic mines could work. And new price controls that increased intervention as prices moved outside a "green" zone of $70 to $80 a ton also curtailed production. Sharp capacity cuts hit as industrial demand took off and global benchmark prices are up 50% to 100% from about a year ago.

As China imported more, it shifted trade and prices rose world-wide. Russian, African and South American coal that once went to Europe has been going to China, analysts said. Importers all over the world have to pay more to fill the gap left behind.

The chain reaction led to more U.S. exports going to every continent. U.S. exports to Europe hit 11 million tons in the first quarter, up 70% from the first quarter in 2016. Exports to Asia rose by about half to 6.4 million short tons, U.S. government data show.

A year ago Cloud Peak Energy Inc. was selling so little coal abroad that it had to take losses on its contracts with shippers and pay them for doing nothing in lieu of taking coal. Now the company is back to being one of the largest exporters in the western U.S., raising exports from almost nothing a year ago to an expected 4.5 million tons in 2017. That grew its revenue nearly 20% in the first half of the year even while domestic sales have fallen.

"We've had a good and stable year, which in our environment is a good year," said Heath Hill, the company's finance chief.

Industry leaders say that good fortune has been backed up by a change of sentiment led by Mr. Trump. Business would have been worse and future prospects would be lower under a Democratic administration that used new rules to move consumers further away from coal, they said.

But the rebound has been so dependent on exports that U.S. producers face a big risk if China undoes last year's policy changes. Chinese coal production is showing signs of picking up again and the government is starting to block some imports to support domestic miners, researchers at Italian ship broker Banchero Costa said Wednesday. With U.S. year-to-date production up 14% from last year, the specter of oversupply is rising again, analysts said.

"When you're at the whim of Chinese policy makers, it's not really a great place to be," said Andy Blumenfeld, head of market analytics at Doyle. "Beyond the first quarter of next year, it becomes very risky."

Mr. Trump's team has made moves primarily to boost the domestic market. It has taken the first steps to try to roll back President Barack Obama's Clean Power Plan that required utilities to reduce power plant carbon-dioxide emissions. The Trump administration also wants to streamline environmental permitting.

The goal is to signal to the market that coal won't be unfairly taxed by regulation, not to prop up coal compared with other fuels, according to an administration official. It has also been pushing other polices to keep feeding a drilling boom that has already made natural gas cheaper and gas-burning plants more competitive against coal.

The Commerce Department did help get a new supply agreement for a U.S. company to ship coal to Ukraine. Pennsylvania-based coal marketing company Xcoal Energy & Resources this month started shipments of 700,000 tons of coal to Ukrainian power plants ahead of the winter. That is to help Ukraine diversify its supply and lessen its dependence on Russian fuels.

But that deal is on pace to amount to less than 1% of total U.S. exports this year. And Ukraine is a small buyer, making more deals of this type hard to replicate and hard to substantially improve the whole U.S. industry, Mr. Blumenfeld said. There was also intense competition to even get the deal.

"It is a price driven market, and if we weren't able to compete into Ukraine, we wouldn't have won the business," said Ted O'Brien, vice president, capital markets at Xcoal.

Miners really need markets to grow now, said Luke Popovich, spokesman at the National Mining Association. There may not be much more Mr. Trump can do.

"The federal government has picked the low-hanging fruit," Mr. Popovich said.

Write to Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

August 27, 2017 13:59 ET (17:59 GMT)

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