International Markets

U.S. Coal Exports Head to China as Domestic Demand Weakens

It’s no secret that the U.S. coal industry is hurting. Coal has been in a secular decline for nearly a decade.

When Trump was campaigning, he promised miners he would bring back coal. But he’s having a rough go of it.

The Energy Information Administration is projecting that U.S. coal usage will drop 4% in 2019 to just 691 million tons. That’s down 44% from in 2007, coal’s peak usage year.

Domestic demand just continues to slow. So U.S. miners have shifted their focus to exports… specifically to China.

China’s Flip-Flop on Coal

In the early part of the 21st century, construction was booming in China. Through 2013, China had 12 straight years of fast-paced growth.

And all that growth required lots of energy – energy that China couldn’t seem to get enough of.

So an overinvestment and buildout of coal-fired power plants ensued. That breakneck and blind expansion led to higher air pollution and water shortages.

China had its fast-paced growth, but it came at a huge environmental cost. Something had to be done to rein in the pollution.

In April 2016, China’s National Energy Administration and the National Development and Reform Commission took action. Both issued decrees limiting coal-fired power plant construction.

Through last year, work was halted on more than 100 plants under construction. But that didn’t stem China’s demand for coal.

Today, China still gets 65% of its electricity from coal-fired generators. And it can’t produce enough coal to meet the needs of those existing coal plants.

So it imports lots of coal. From January through October of last year, China imported 252 million tons.

That’s an 11% increase from the same period in 2017. And it isn’t much below 2017’s total imports of 279 million tons.

Can Chinese Imports Save U.S. Coal?

That brings U.S. coal mining back into China’s supply picture.

U.S. demand for coal has been declining, leaving the export market as U.S. coal’s last great hope.

Last year, the U.S. coal export market jumped 61%. That was largely due to a doubling of exports to Asian customers.

So… is it time for U.S. investors to jump on the coal export bandwagon?

Not quite.

As China closes some of its older coal mines, it’s granting operating permits to newer, larger ones.

This additional capacity may reduce the need for imports.

But there’s more to coal’s sad story…

Coal’s demise directly coincides with the rise of natural gas production.

It leaves U.S. coal exports – and U.S. coal in general – with a sketchy future.

I’d stay away from coal and focus on natural gas. I’ll talk about that in my next issue.

Good investing,

Dave