World's coal miners may be digging themselves into another glut

A global push to dig new mines for steelmaking coal is drawing warnings that a supply glut could push the industry from a boom to a bust, mirroring the brutal 5-year price slump that ended in 2016.

Coal’s use to generate electricity has declined precipitously in the U.S. despite a revival push by President Donald Trump. That’s left metallurgical coal as the only part of the industry still thriving, with strong global demand and barely-growing supply combining to double the seaborne price since 2016 to more than $210 a metric ton.

Earlier this week, Consol Energy Inc. joined at least five other miners from the U.S., the U.K. and Australia in planning major new projects. It’s an aggressive strategy that has some worried the industry may end up boosting output too much too quickly, just as consumption slows. If so, prices could crater.

“The supply-demand balance in the space is very tight,” said Scott Schier, an analyst at Clarksons Platou Securities Inc. The industry could handle one or two new projects, he said, but “if more and more tons start coming online, it would be concerning.” Consol Energy Inc. joined at least five other miners from the U.S., the U.K. and Australia in planning major new projects. It’s an aggressive strategy that has some worried the industry may end up boosting output too much too quickly, just as consumption slows. If so, prices could crater

Demand for met coal climbed 17 percent from 2015 through 2018, according to Bloomberg Intelligence. That helped soak up a glut that peaked in 2014 when global consumption of 284 million tons was outpaced with a total supply of 313 million tons.

Peabody Energy Corp., the biggest U.S. coal company, has already expanded output by acquiring the Shoal Creek mine in December, and says that the Alabama facility was the top contributor to earnings in the first quarter. The St. Louis-based company paid $387 million for the site and expects to recover that in less than two years.

But it came as global consumption is expected to increase less than 1 percent through 2020, according to Bloomberg Intelligence. New mines threaten to “undo the bullish seeds that drove the entire rally,” said Andrew Cosgrove, a mining analyst at Bloomberg Intelligence, by telephone. “It’s death by 1,000 cuts, and we’re 500 cuts into it now.”

The newest entrant comes from Consol, which announced plans May 8 for a new project in West Virginia. The Itmann mine is expected to reach full capacity in 2021, and its returns will exceed capital costs even if prices fall to $150 a ton, the company said on a conference call. While the company expects to see other producers also boosting output in the coming years, Consol said the site will deliver a higher quality variety that will face less competition.

Warrior Met Coal Inc. is preparing its Blue Creek mine now, including lining up financing options and conducting core drilling, the company said last week on a conference call. While it doesn’t plan to make a final development decision until early next year, the Alabama project will be fully permitted. Mark Levin, an analyst with Seaport Global Holdings, said in a research note that it’s “likely” the company will green-light the mine.

Arch Coal Inc. is already extracting modest amounts from the Leer South site it announced in February. The project is expected to employ about 600 workers and will go into full production in 2021, supplying a market the company described then as “ undersupplied.” The American Coal Council estimates that a major coal mine can provide 200 to 600 jobs.

Saint Louis-based Arch said in April its plan is based on estimates of global demand increasing by about 1.5 percent annually, while production capacity shrinks by about 2 percent as existing mines are depleted. An Arch spokeswoman didn’t respond to inquiries, and a spokesman for Warrior declined to comment.

In the U.K., West Cumbria Mining Ltd. won approval in March for the country’s first deep coal project in more than 30 years, and the Woodhouse Colliery mine is expected to start producing met coal in 2021. Meanwhile, at least two new sites are under development in Australia. The Ironbark 1 mine run by Fitzroy Australia Resources Pty and the Olive Downs mine run by Pembroke Resources Pty are both set to start production in 2020.

(Michael R. Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP, financially supports the Sierra Club’s Beyond Coal campaign, which seeks to retire U.S. coal-fired plants.)

(By Will Wade)