Ken Silverstein Senior Contributor
The world’s largest coal producer, Peabody Energy BTU -23%, is at risk of going bankrupt for the second time in five years. It’s all a function of the demand for coal, especially now during the coronavirus. But the potential trouble is indicative of something much bigger — the transition from coal to natural gas and renewables.
The future of thermal coal used to make electricity is not bright. But metallurgical coal has a role in the production of steel. And this is where Peabody and others like Arch Resources are placing their bets. “Met” coal is used to make 70% of the world’s steel and once the pandemic subsides, economic growth will resume.
And therein is the potential path forward for President-elect Biden and a possible Republican-dominated U.S. Senate: building better bridges, ports and transmission systems is a good thing that enjoys wide support.
“Suffice to say, we’ve had a tough year here,” Peabody’s chief executive Glenn Kellow said on a conference call yesterday. ”Market conditions have and continue to severely impact customer demand … The combined risks associated with our recent financial results, market conditions, additional collateral demands and potential credit agreement non-compliance raise substantial doubt about . . . our ability to continue as a going concern.”
Peabody told investors on Monday that it had lost $67 million in the third quarter while coal sales fell by 23%. Meantime, revenues from the sales of met coal used to make steel fell by more than 63%. However, Kellow says that he is optimistic that this segment will pick back up — at some unknown point in time. MORE FOR YOUAppalachian-Area Candidates Are Campaigning To Create Clean Energy Jobs For Struggling FamiliesNatural Gas Vehicles Are Making Inroads And Want Joe Biden To Get AboardVice-Presidential Debate Fueled By Talk Of Energy, Environment And Climate Change
It’s the same position in which Arch finds itself, which is another major producer. In a filing with the U.S. Securities and Exchange Commission, it says that 70% of its operating cash flow is coming from the sale of met coal — a number that it expects to rise by 1% a year for the next five years. It also said that its revenues from the Powder River Basin had dropped 10% since 2017 — coal used to generate electricity.
Metallurgical coal is primarily sold to steel mills and is baked until it is refined into coke, which is then burned to smelt iron. Steel offers the highest strength-to-weight ratio of any commonly used construction material and it is exceptionally durable. Every kind of power plant uses steel, including wind turbines.
“The economy is collapsing and we need to get people relief,” says Costa Samaras, the director of Carnegie Mellon’s Center for Engineering and Resilience for Climate Adaptation, in an earlier interview with this reporter. “Infrastructure is a natural way to get the economy moving and we can borrow cheaply right now.
“It is the role of government to protect and to invest in this nation for the immediate and long term,” he adds. “The goal is to ensure that the country is not just resilient but that it is climate-resilient.”
The American Society of Civil Engineers estimates that upgrading our surface transportation infrastructure alone will cost more than $1 trillion. More than $3.6 trillion is necessary for all types of infrastructure projects. And if infrastructure spending rises so, too, does the demand for coal. A lot of other companies tied to the energy sector would go along for the ride as well, which include engineering and construction firms like Babcock & Wilcox BW +3.4%, Bechtel, Fluor Corp. FLR +1.9%, Jacobs Engineering Group, KBR Inc. KBR +0.8% and MasTec Inc. MTZ -0.3%
Most Democrats favor a federal role for the expansion and an improvement of the nation’s infrastructure — especially investments made to facilitate the use of green energy. By contrast, Republicans are remiss to further run up the federal deficits given the massive tax cut for corporations and recent subsidies for households. But the coal industry is in trouble. And the most immediate hope it has is to increase infrastructure spending so that it can make money selling met coal.
The irony here is that President-elect Biden has the potential to save coal — to spend federal resources building green infrastructure projects. It’s a win-win for everyone, including Peabody, Arch and other coal enterprises.