The Gristle

Dirty Little Not-So-Secret
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DIRTY LITTLE NOT-SO-SECRET: What if your partner who was not especially solvent and whose financial profile was headed in a terrible direction proposed a new business venture with considerable risk and downside? Sure, there’s potential for upside, and your initial entry costs appear low; but there’s also long-term liability and costs you’re on the hook for no matter what happens to the venture or partner. Does that sound like a deal to you?

RE Sources and Power Past Coal brought a financial expert on the coal industry to the Pacific Northwest last week, who—in addition to lending insight into the precarious health of that industry—posed that question.

“If you want a partner for economic growth in your counties and your cities, try something other than coal,” Sanzillo advised listeners that included the Mayor of Bellingham and a plurality of City Council. He delivered a similar message at a press conference in Seattle the previous day.

Sanzillo is the director of finance at the Institute for Energy Economics and Financial Analysis, a group working to reduce the world’s dependence on coal and other fossil fuels. He has served as the acting comptroller for the state of New York. He led an analysis and report released by IEEFA last week that found the financial profile of the coal industry was in collapse and that U.S. coal ports already in existence could easily handle export capacity. In fact, the report indicates, U.S. coal ports are oversupplied.

“That means,” the report is blunt in opening paragraphs, “that plans for new coal port capacity are ill-conceived, including the very large proposals being considered in the Pacific Northwest and in Gulf Coast states. Coal and shipping interests have proposed six new export terminals in the Northwest alone in recent years. Developers cancelled projects at three sites, however, and a fourth has had a crucial state permit denied, where the federal government has suspended permit processing pending state appeals.”

Meanwhile, the report establishes, the global price for thermal coal has sunk to five-year lows, and most major coal-consuming nations are rethinking their energy strategies. Most major banks and analysts have backed away from previous projections of new investments in coal mining and exports.

“Any serious consideration of coal markets should suggest to public officials that the coal industry is a poor investment partner now and for the foreseeable future,” Sanzillo said.

Coal exports from the United States have actually declined since the peak year of 2012 to due a variety of forces that include changes in global markets and energy policy decisions by major importers of fossil fuels. In 2013, producers exported 100 million tons, down from 125.6 million tons in 2012. According to coal-export reports through August 2014, the amount of coal shipped in 2014 could be as low as 80 million tons, a 36 percent decline from the 2012 peak.

“This broader backdrop creates severe headwinds for the coal port proposals in Washington State,” Sanzillo notes in his report. “In 2012, the peak year for U.S. coal exports, ports in British Columbia handled coal primarily from Canadian mines in addition to some from U.S. exporters. Since then, British Columbian ports have pressed forward with ambitious port-expansion plans—including a doubling of the capacity of the Ridley and Neptune terminals, significant capacity expansions at the Westshore terminal, and a proposed development of a new eight-million-metric-ton coal export facility at Fraser Surrey Docks in metropolitan Vancouver.

“Yet even in the face of these expansion plans,” he notes, “demand for British Columbian coal-port capacity has declined.”
The financial health of coal producers is also imperiled. Following a report last May by Goldman Sachs that found major new coal projects are unlikely to be profitable, investment in the industry plunged to junk bond status.

“The character of investment has dramatically changed,” Sanzillo said, “a shift from what was once considered a safe, solid investment to more speculative, high-risk investors.”

In October, Goldman analysts reaffirmed their gloomy outlook, again downgrading its thermal coal forecast as China shifts its economy away from energy-intensive growth and reduces imports of the fuel. China, which accounted for 79 percent of the growth in global consumption since 2000, is cutting coal imports amid domestic prices near the lowest in seven years. Hedge funds are preparing to short both coal stocks and bonds in anticipation of bankruptcies, the Wall Street Journal reported.

While India and parts of Southeast Asia may increase their coal consumption, other coal sources in closer proximity—such as mines opening in Australia and Indonesia—continue to frustrate the plans of U.S. coal producers.

“One of the persistent canards of modern coal-industry advocates is that coal is now and always will be the engine of global growth,” Sanzillo said. “It’s a myth that supporters of proposed U.S. coal-export ports continue to spin, and a perfect example of those efforts is unfolding in Washington State, where proponents are proposing new ports at Cherry Point and Longview.”

It’s a necessary canard, he told listeners, that serves to hold investor interest as these companies struggle for equilibrium.

It’s also an eerie echo of efforts in the 1990s to build a smaller pier at Cherry Point, an effort that wound successfully through a lengthy permitting process before being mothballed. That earlier pier could still be built; it simply makes no financial sense to do so. It’s a caution that the permit can be of greater value than the project.

“New coal-export ports are boondoggles,” Sanzillo said, “a waste of money, both public and private, and an unfair burden on the communities being asked not only to host these facilities but to believe in them as well. The economic fundamentals say they should not be built.”

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