Three short years ago, the conventional wisdom was both that growing thermal coal demand in Asia couldn’t be met by regional suppliers, and that low-cost coal from the US would fill the breech. Several new coal ports, notably in Oregon and Washington, were already in the early stages of permit approval, hoping to help fill this void.
Port projects in permitting phase in the US Pacific Northwest
The intervening three years have made clear what a miscalculation this was. Opposition to the major projects – Gateway Pacific, Millennium and Port Morrow – has been effective, led by a broad coalition of environmental groups, tribal nations and local and national governments . But as challenging as this was for port developers, the larger problem has been economic.
Successfully exporting low-cost coal from frontier regions, notably the US Powder River Basin (PRB), to Asia requires producers to exploit one of two conditions. Either they must satisfy demand that Asian producers are unable to meet or they must outcompete Asian producers for their existing market. But Asian demand has weakened to the point that coal from frontier regions won’t be needed for many years. To sell coal in Asia, therefore, PRB producers must now outcompete Indonesian producers for existing market. And in the new coal price paradigm, they cannot.
PRB coal is produced at very low operating costs, typically in the range of US$10-15/t FOB mine. But exporting this coal requires an inland railroad transport of 2,000 km to the northwest Pacific coast or 1,500 km to the Mississippi River for barging to ports in the southern US and eventual ocean freighting to market. Either way, costs increase by at least US$30/t at the origin port. With port and ocean freight costs included, delivered PRB costs are well above those of Indonesian producers. Three years ago, this was not the case.
In 2015 energy-adjusted US$/t terms, the 2012 delivered price of Indonesian coal equated to a PRB coal price that was US$20/t above its costs. That so-called “netback” margin has been erased. Today, the delivered price of Indonesian coal equates to a PRB coal price that is US$12/t below its costs – an astonishing US$32/t swing in competitiveness. This remarkable shift in competiveness follows the rapid deceleration in the market price of coal, itself largely a result of declining growth in demand. Making matters worse for the PRB, future demand in Asia will continue growing less robustly than in the past. Negative netback PRB margins will persist. PRB coal simply will not compete in Asia until well after 2020.
When will it compete? When local producers are unable to satisfy Asian demand with anything but their most expensive reserves. Then, the rising tide of growing demand will lift all producer’s boats, including the PRB’s. But there is a hitch. The popular rise of non-coal alternatives, supported by policy and regulation, continues to slow growth in coal demand. The costs of PRB coal, too, may rise on more onerous leasing terms.
The result of all these current and possible developments? Building new Pacific Northwest coal ports, once seen as essential, is now viewed as nothing more than a risky long-term bet.