When Arch Coal, the second-largest producer of coal in the US, filed for chapter 11 bankruptcy protection at the outset of 2016, it was the latest in a long run of bad news for the American coal mining industry.
Arch Coal's bankruptcy filing is part of a plan to wipe $4.5bn in debt from its balance sheet, ceding control of most of the company to major lenders in a debt-for-equity agreement that is intended to "position the company for long-term success", according to its press release.
Operations at Arch's mines in Appalachia and the Midwest are expected to continue uninterrupted without significant lay-offs affecting its 4,500 employees, but the company's struggles are an echo of the pain that is ringing around the US coal sector as the country continues its energy transition away from coal and towards gas and renewables. Even in the short-term, the bankruptcy filing makes it significantly less likely that Arch Coal's planned new coal projects in Montana and Washington will go ahead, according to environmental non-profit the Sierra Club.
An industry in distress
"Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry," said Arch's chief financial officer John T Drexler in a filing with the bankruptcy court in St. Louis, Missouri. "Several major US coal companies have filed for chapter 11 protection in the last several years, and virtually all are in distress."
Distress might be the best word to describe it - and acute distress at that. Using 2013 government figures as a reference, Reuters noted in January that companies representing more than a quarter of US coal production are currently in bankruptcy. As well as number two producer Arch Coal, the chapter 11 casualty list includes the US's fourth-largest producer Alpha Natural Resources, which made its own filing in August 2015.
And in April 2016, the world's biggest private-sector coal company and the top producer of coal in the US, Peabody Energy, became the latest and largest domino to fall. The company announced that it was also seeking chapter 11 protection amidst what it described as "an unprecedented industry downturn" that has left it with a debt burden of more than $10bn. Like Arch Coal, Peabody expects that its mining operations will continue as normal, but as environmental group Friends of the Earth (FoE) noted in response to Peabody's filing, coal has become a tarnished investment prospect.
"With Peabody joining Alpha and Arch Coal in bankruptcy, a clear signal has been sent: coal is a bad investment for investors as well as the future of the planet," said FoE president Erich Pica, before suggesting that bankrupt US coal miners should abandon coal mining entirely as a starting-off point for restructuring. "Any reorganization must leave remaining coal reserves in the ground, finance the clean-up of the areas that have already been impacted and honour the previous commitments they have made to their workers."
Optimistic coal executives have been waiting for a rebalancing of the market and the resulting coal price rally. "We know that transition is going to take place. It has historically and it always will -- and it will in the future," former Peabody Energy CEO Greg Boyce told the St. Louis Post-Dispatch in January 2015, just a week before stepping down from his leadership position at the company.
But the fact that the coal sector has endured downturns in the past doesn't necessarily mean it will always be able to bounce back in the future. It could be that the US energy landscape is slowly gravitating towards a market balance that permanently pushes coal to the sidelines.
A perfect storm of factors has caused the closure of more than 250 coal mines in the last few years. Coal prices are depressed and show few signs of recovery, major coal companies are operating at a loss (Arch Coal and Peabody Energy made a combined loss of $1.2bn in 2014) and the Dow Jones US Coal Index has seen share prices plummet - Peabody Energy's share price tumbled by 18% on news of Arch's bankruptcy filing and the prospect that coal pricing will remain lower than expected in 2016.
What are the factors driving this prolonged decline, and what implications do they have for the future of coal mining in the US?
Domestic troubles: green regulation and the gas surge
Over the course several years and culminating at the historic UN Climate Change Conference in Paris in December 2015, the international narrative on global warming has shifted, the framing of the discussion morphing from a somewhat distant conundrum to an urgent rallying call for immediate action.
This shift has been reflected in environmental legislation emerging from the US federal government. The final form of the Environmental Protection Agency's (EPA) Clean Action Plan was unveiled in August 2015, introducing the country's first national standards to limit the carbon emissions of power plants. New coal plants will be limited to CO2 emission of no more than 1,400lbs/MWh of electricity produced, meaning that new-build plants will have to incorporate carbon capture or other emissions-reduction technologies to comply.
In its bankruptcy filing, Arch Coal attributed the closure 400 coal-fired generators - key customers for coal miners - to EPA regulations, and noted that around 23% of the US's remaining coal-fired generating units are expected to retire or convert to natural gas by 2025.
As much as the American coal sector may wish to demonise environmental regulation, new EPA rules are only marginally responsible for the decline of coal-fired power plants and the chipping away of the mining industry's customer base. Coal demand had already been falling - the fossil fuel's share of US electricity generation fell to 30% in April 2015 as cheaper, cleaner natural gas flooded the market and started to displace it. EPA modelling in the wake of the Clean Action Plan puts coal's share of the energy mix at around 27% by 2030.
The glut of natural gas from domestic shale operations is a major (perhaps even the decisive) driver in the decline of coal. With more than 60% of coal-fired power plants in the US more than 40 years old and many approaching the end of their life-cycle, it is gas generation capacity that is set to replace them, meaning that precious few new coal plants are being planned - with or without EPA restrictions.
The Energy Information Administration projects that the US has enough gas to last 87 years at the current rate of consumption, which is likely enough to support energy security while renewable deployment ramps up. Meanwhile, slight increases in gas prices over the last few years have done nothing to arrest the coal price decline, as would be expected.
"Coal and gas are no longer intertwined - there is a structural change," Carbon Tracker Initiative senior researcher Luke Sussams told the Pacific Standard in May last year. "There will be variability in the trend, but coal is in a consistent and steady decline."
In the long-term, the commodity cycle that miners are relying on to come back around may no longer apply to coal - sources of domestic demand that are starting to disappear today are unlikely to come back tomorrow.
Chinese slowdown weakens international coal demand
While in previous years coal miners might have been able to rely on strong foreign markets to compensate for falling domestic demand, that is less and less the case today. Part of that is down to a strong dollar, which weakens the competitiveness of US exports. That issue exacerbates a wider problem: the gradual shrinking of strong foreign export markets, heralded by the economic slowdown in China, an all-important market for many commodities including coal, of which it uses as much as the rest of the world put together.
As China's previously rampant growth falters and deep cracks begin to appear in Asia's largest economy, the export potential of US coal - especially with today's low prices - is diminishing. Chinese coal consumption fell by 3% in 2014 as its construction and steelmaking sectors contracted, and economic indicators such as these are being reinforced by the country's pledge to peak carbon emissions by 2030 and reduce air pollution in its cities.
Protectionist measures employed to sustain China's domestic coal production industry have also proven effective, reducing its coal imports by 22% year-on-year in the second half of 2014.
Way back in 2013, a Bernstein Research report highlighted the importance of healthy Chinese coal imports to the global export market. "Once Chinese coal demand starts to fall, there is no robust growth market for seaborne thermal coal anywhere," the study noted. "Developed market consumption is weak everywhere due to some combination of low gas prices, rising environmental concerns and low levels of industrial activity. That leaves just one large, structural growth market for coal - India."
Indeed, coal-importing countries such as India will likely ensure that US coal will have a reasonably long tail until domestic coal production capacity can be ramped up. There will be no sudden collapse - major coal mining operations are too important to state and local economies to be allowed to fall apart at speed. Nevertheless, the economic, environmental and regulatory signs are there - the beginning of the end has arrived for US coal, even if it's unclear how long the final chapter will be.