U.S. coal producers must sharpen focus on export markets, Deloitte says

With U.S. coal producers seeing their domestic market under pressure from tougher EPA standards and cheap natural gas, a survival strategy might rest with increased exports and diversification.

That’s the crux of a just-released coal report from Deloitte titled “Winning in a downward market.”

The 15-page report urges a survival strategy that includes increased involvement in export markets for both metallurgical and power generation fuel as well as diversification by participating in coal trading and freight desk logistics.

Deloitte believes this can be pulled off without dramatically increasing market risks.

“Faced with flattening demand and increasing regulatory pressures at home, U.S. coal producers need to have an integrated commercial strategy to help expand their reach and thrive in an export-driven market,” Deloitte said. “Such a strategy may necessarily force them to reassess the risks they are taking as an organization, and reallocate more of their risk-taking away from core marketing operations and into other areas of the business to position them for growth in international markets.”

Growth potential seen in Japan, Korea

For years, Europe has enjoyed low logistics costs and established customer-supplier relationships, and these markets will continue to be foundational demand sources for U.S. thermal coal, the consulting firm said.

“Still, Asian countries, such as Japan and Korea, are beginning to benefit from their proximity to West Coast ports and preferred growth rates. Japan, which is only 3,800 miles from Ridley terminal, will likely see 2% CAGR [compound annual growth rate] in its thermal coal market; Korea, just 4,262 miles away, is in line for 5% CAGR,” Deloitte said.

Japan and Korea “are very particular” about the specifications and qualify of their coal for power generation.

“Fortunately, U.S. coal from the Powder River Basin (PRB) is well suited to the Korean market, while coal from the Western Bituminous region can serve the Japanese market,” Deloitte said. The PRB coal can eventually make its way to the Asian markets through the Ridley terminal, depending on the competitiveness of the rail transportation cost to the ports.

International ‘boots on the ground’ needed

The Deloitte report urges U.S. coal producers to place more “boots on the ground” in key international coal markets. U.S. companies could blend longtime employees with local hires in the customer country.

Joint ventures and partnerships with local players can also help accelerate the time required to enter new markets.

The logistics of exporting coal to customers “on the other side of the world” can make it tough to “wring profits from direct exports,” Deloitte said. The firm suggests that U.S. operators try third-party purchases on the spot market and acting as a market aggregator in certain geographies.

This is an alternative to entering new markets through acquisitions, which can be “extremely capital intensive,” Deloitte said.  “Origination, by contrast, can be an “asset light” approach to gaining access to new supplies that meet complex customer needs,” Deloitte said.

Companies should consider starting a freight desk that looks at owning a portfolio of rail, barge, and terminal contracts, as well as time and voyage charters. When a producer has a dedicated freight desk, it enables the company to compete on a “delivered cost” basis by more efficiently managing their freight commitments, Deloitte said.

A freight desk would also enable producers to backhaul other dry-bulk cargo such as iron ore and cement on their return trip after delivering coal.

Consider coal trading, including in metallurgical coal markets. Participating in trading markets is a valuable way for players to discover industry intelligence, Deloitte said.

The trading operation would also likely be heavily involved in helping the board determine the company’s appropriate risk allocation, as traders will be actively managing and monitoring risk in many forms on a daily basis, Deloitte said.

The consulting firm said it conducted an eight-week study that spanned United States, South America, parts of Europe, Asia (including China, India, Indonesia, and South Korea), Australia, and South Africa.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.