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The Economics of Coal


By Sara B. Potter, CFA  |  April 24, 2019

We have seen dramatic shifts in U.S. environmental policies over the last two years as the Trump administration has worked to reduce overall industrial regulation. The coal industry has been the intended beneficiary of many of these changes, which include the proposed repeal of President Obama’s Clean Power Plan and withdrawal from the Paris Climate Agreement.

In conjunction with these shifts, we have seen slight increases in coal production and employment. However, while the coal industry’s secular decline has paused over the last two years, the long-term outlook doesn’t look good.

Coal’s Dominance—A Thing of the Past?

To better understand the current state of the coal industry, it’s helpful to look back over history. U.S. industrial production of coal increased steadily in the last three decades of the twentieth century, before stabilizing right around the year 2000. In the 1970s, there was a building boom for coal-fired power plants as oil prices surged; this boom continued well into the 1980s. As a result of this expanded capacity, coal output expanded by 60% between 1972 and 1999. Interestingly, due to rapid technological innovations that boosted labor productivity, employment in the coal industry fell dramatically over this same time period. Between 1979, when employment in coal mining peaked, and 2000, the industry lost nearly 75% of its jobs. As output stabilized after 2000, so did employment.

This began to change in 2012. Between the end of 2011 and April 2016 (when industrial production hit its historical low), employment and industrial plummeted by 43% and 46%, respectively. What was going on during this time?

Coal IP and Employment

Power Plants Shift to the Cheapest Energy Source

According to the U.S. Energy Information Administration (EIA), in 2017 92.7% of U.S. coal consumption was for electricity generation. Just as soaring oil prices led to a surge in coal production and employment in the 1970s, a sudden and sustained drop in natural gas prices has had the opposite impact on coal over the last 10 years. During the global financial crisis (2007-2009), commodities in general took a hit as global demand dried up. Natural gas was particularly hard hit, with prices plummeting from a peak of $13.35 in June 2008 to a low of $2.98 in August 2009, a 78% drop. Prices never fully recovered. Natural gas prices went from a monthly average of $7.36 between 2003 to 2008 to an average of $3.43 from January 2009 through today, more than a 50% drop.

These lower price levels are due to a surge in natural gas supply. Just as coal producers benefited from productivity gains in the 1980s and 1990s, natural gas producers have been taking advantage of technological advances that have dramatically increased productivity over the last decade. These advances include horizontal drilling and hydraulic fracturing (“fracking”)— technologies that allow drillers to more easily extract natural gas out of shale rock.

The availability of plentiful and cheap natural gas has had a dramatic impact on electricity generation in the U.S. As shown in the chart below, in 2008 coal powered 48.2% of electricity generation; last year, its share was just 27.4%. At the same time, natural gas has overtaken all other energy sources, now making up 35.1% of total electricity generation. Alternative energy sources such as wind and solar are also becoming more affordable and now represent 8.2% of total electricity generation.

Shares of Electricity Net Generation by Source

Geography is also a factor when looking at relative fuel costs. While the national average share of electricity generated with coal has fallen, that share varies greatly by state. Coal’s share of total electricity production is significantly higher in the two states that produce the most coal, Wyoming (85.7%) and West Virginia (93.2%). Power plants were purposely built near the coal mines in these states and coal remains the most economical fuel for these plants. But for power plants further away, coal needs to be transported by rail, and this makes coal the more expensive fuel source, pushing these states to shift to natural gas and alternative energy sources. As coal becomes less competitive to burn, less of it is transported via railroads. According to the Association of American Railroads (AAR), coal accounted for one-third of rail carloadings in 2017, compared to 48% in 2009.

Coal Exports Are on The Rise

While coal’s dominance for domestic electricity production is waning, global demand for U.S. coal is increasing; in fact, the U.S. is a net exporter of coal. According to the EIA, in 2018 15% of U.S. coal production was exported to other countries, with exports reaching their highest level in five years. The U.S. exports both steam or thermal coal, used to generate electricity, and metallurgical (met) coal, which is used in the steel-making process.

Coal Exports

While global demand for thermal coal is strong, coal destined for steel production is the most profitable for producers. Last year, met coal made up 53% of total coal exports and this share is likely to move higher over the next few years. Strong demand from Asian countries for met coal has helped to support higher global prices, encouraging U.S. producers to increase their investments in met coal mining. Coal mined in the Appalachia region is particularly suited for steel production, and with the region’s proximity to coastal export facilities, the producers in this region are well-positioned to boost their export production.

U.S. Coal Producers Boost Investments to Meet Global Demand

According to the EIA, the three biggest U.S. coal producers in 2017 were Peabody Energy, Arch Coal, and Cloud Peak Energy. Examining the recent performance and developments at these companies highlights the industry trends and future of the coal industry.

Coal companies share of revenue in US

Three years ago, Peabody Energy Corp. filed for Chapter 11 bankruptcy, unable to service its $10.1 billion debt as coal prices plummeted. Following a debt restructuring, the company emerged from bankruptcy a year later. The largest U.S. coal producer, Peabody was responsible for 20.2% of total U.S. coal production in 2017. In its Q4 2018 earnings call, company management went out of their way to stress its ongoing investments in its seaborne metallurgical (met) business. The company projected that the recently purchased Shoal Creek mining facility in Alabama, part of its seaborne met strategy, would “quickly position itself as one of the company’s top adjusted EBITDA contributors.” The company is already heavily reliant on exports; according to FactSet GeoRev data, less than half (47.8%) of Peabody’s revenue is generated in the U.S.

Similarly, the second biggest U.S. coal producer, Arch Coal, filed Chapter 11 in early 2016, exiting bankruptcy nine months later after erasing $5 billion in debt. Today, the company is also looking to expand its export potential, having recently announced plans to build a new mine in Barbour County, West Virginia, focused exclusively on producing coking coal for global markets. According to Arch CEO, John Eaves, with the addition of the new Leer South mine, “Arch will greatly enhance its portfolio of world-class coking coal assets and cement our position as the premier global producer of High-Vol A coking coal. We believe there is significant unfulfilled global demand for High-Vol A coking coal generally, and for our Leer brand specifically, and are already engaged in discussions with leading steel producers around the world that are eager to secure additional volumes of our Leer-brand products.” FactSet data shows that 46.3% of Arch’s revenue is U.S.-based; once this new mine comes online, this share is likely to fall further.

It looks like the third biggest coal producer on the 2017 list, Cloud Peak Energy, will follow the other two companies in filing Chapter 11. In an attempt to avoid bankruptcy, earlier this month the company got a two-week reprieve on its $1.8 million debt payment by entering into a forbearance agreement with its lenders and bondholders. Signals of trouble have been getting louder and louder in recent weeks. The company’s latest annual report, filed on March 15, indicates management’s “substantial doubt about our ability to continue as a going concern.” On March 26, the New York Stock Exchange (NYSE) suspended trading for the company’s stock due to low price levels; the stock is still being traded on OTC markets, at a current price of $0.07 per share. NYSE officially delisted the stock effective April 22.

Compared to Peabody and Arch, Cloud Peak is highly dependent on the U.S. electricity generation market to sell its coal. While 28.4% of its revenue comes from thermal coal sales to South Korea, the company generates more than two thirds of its revenue in the U.S. Headquartered in Gillette, Wyoming, the company’s coal operations are located exclusively in the Powder River Basin (PRB), which only produces thermal coal. As discussed above, while this allows Cloud Peak direct access to domestic coal-burning plants near its mines, transportation costs to ship coal to other regions in the country make it less competitive.


While many observers have been quick to blame environmental regulations for the decline in coal’s dominance, the truth is that market forces driven by technology progress have been the culprit. But U.S. coal producers see opportunity in overseas markets. This dynamic has been giving new life to the U.S. coal industry, not easier regulations. In fact, the coal industry would benefit from more regulations—specifically to regulate fracking in the natural gas industry. But in the current push to deregulate all U.S. energy sectors, this is highly unlikely to occur.

Sara Potter, CFA

Senior Marketing Content Specialist and Economic Contributor

Ms. Sara Potter is a Senior Content Specialist and Economic Contributor at FactSet. In this role, she develops a wide range of marketing content, as well as curates and contributes to the FactSet Insight blog, providing commentary on a wide range of economic and market topics. Since joining FactSet in 1999, she has led application and content development teams, focusing on the development of products to facilitate the analysis of global markets at a macro level. Prior, she held research economist positions at Toyota and Standard & Poor’s/DRI (now IHS Markit). She earned an M.A. in International Economics and Finance from Brandeis University and a B.A. in Math/Economics and French from Dartmouth College. She is a CFA charterholder.


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