As the news broke of the US election result, stock prices for global metals and mining companies jumped as the reality of a Trump presidency set in. Some of these gains were short-lived; initially spot gold prices saw a 2.2% rise as investors piled out of the US dollar to invest in gold as a safe haven. However, trading jitters settled only hours later and gold dipped back to pre-result levels, with stock prices for gold miners also seeing a slight fall.
Yet for miners of other commodities and crucially, metals companies, the outlook seems positive. From a global perspective, the Trump campaign’s promises to revive US manufacturing and to invest in infrastructure presents opportunity. If President Trump proceeds with a large-scale infrastructure spending plan, then US demand for steel, aluminium and copper will increase. For metals and miners, this will be welcome news, particularly as demand from China is not set to change significantly over the next few years.
With the election of Trump, US coal miners are also hopeful of better times ahead. Yet all may not be as it seems.
Dark years for US coal
The challenge for US coal miners over the last few years has been how to best recalibrate their commercial strategies on account of the changing energy mix. 2015 and 2016 have been particularly bruising for the industry; the bankruptcies of Patriot Coal, Walter Energy and Alpha Natural Resources last year, and the chapter 11 filing of Arch Coal earlier this year, were the latest in a series of warning signs that even the largest US coal behemoths were failing to cope with market conditions. The largest US producer, Peabody Energy, has reported consecutive losses for nearly two years and has also filed for chapter 11.
Since 2008, the government has stated its ambition to become self-sufficient in ‘cleaner’ forms of energy such as natural gas, and has also shifted its focus towards the development of renewable energy strategies. The coal mining industry, despite being a significant employer in a number of states, has been neglected and allowed to decline. The 2015 signing of President Barack Obama’s Clean Power Plan, which centred on the reduction of carbon emissions from US power plants, hit the coal mining industry particularly hard.
Then in January 2016 the government put a freeze on issuing new leases for coal mining on public lands (about 40% of US coal production is based on federal land), and also announced plans to review the process of how coal mining leases are awarded. A report in 2014 from the Government Accountability Office estimated that the government was losing out on around USD1bn per annum on account of undervalued leases for big coal companies. The government hoped the lease restructure would increase royalties from the sector which could in turn be reinvested in reclamation. The move had the support of environmental groups, who have long complained about ‘outdated’ leasing policies. For coal miners, lease costs were set to increase, putting further strain on the balance sheet alongside reclamation costs.
2015 and 2016 have been especially tumultuous, but represent only a continuation of endemic decline. Over 200 coal power plants in the US have shut down in the last few years, while 50,000 coal-related jobs have been lost between 2008 and 2012. US mines produced 25% less coal in 2015 than they did in 2008, down to 900 million tons. Companies that have dominated the landscape for decades have folded, and coal mining communities have seen huge increases in unemployment. Coal miners have argued that government policy, and Obama’s ‘war on coal’ has hastened the demise of the industry.
The campaign trail
In March 2016, Hillary Clinton participated in a town hall meeting in West Virginia, a state that has historically been ‘coal country.’ During her speech, Clinton remarked, ‘We’re going to put a lot of coal miners and coal companies out of business, right?’ The comment was unfortunate. Quickly taken out of context, coal miners responded angrily. During the remainder of that Town Hall speech, Clinton had spoken about how she intended to replace coal mining jobs with jobs in the renewable energy sector. It may have been that Clinton’s comments angered voters, but ultimately the message that a Democratic White House would continue in its plans to prioritise the development of natural gas and renewable energy sources still shone through.
In stark contrast, the Trump campaign promised to reverse several of the Obama administration’s environmental initiatives, saying that they were ‘job killing’ regulations. Trump repeatedly appeared in coal mining states. These communities, where job losses had hit hardest, were fertile ground for Trump to promote messages that the Democrats and President Obama did not care about coal mining communities, that the government was determined to kill the coal industry, and that Trump planned to reverse the trend. Placards reading ‘Trump digs coal’ became commonplace, and coal miners, like the oil companies, backed Trump throughout the campaign. The coal companies backed Trump’s message and, crucially, entrenched it further; coal being essential to produce low cost electricity for millions of hard-working Americans, and the travesty of the government’s lack of concern about mining jobs losses to coal communities. Perhaps unsurprisingly, coal mining company bonds surged as the election result was announced.
A Trump presidency
It is clear that since 2008 the US government has pivoted towards the benefits of domestically sourced natural gas, and also the advantages of investing in renewal energy. Policies prioritising these energy forms and broader policies that have sought to protect the environment, such as the Clean Power Plan, have piled pressure on the coal mining industry which, in reality, has been in a state of decline since the 1980s. As alternative and cleaner forms of energy have become cheaper, coal has lost its lustre.
Trump may seek to dismantle legislation designed to protect the environment and lower Environmental Protection Agency (EPA) taxes in a populist move to pacify coal communities. Controversially, the President elect has also promised to ‘cancel’ the Paris Agreement. Precise policy plans are yet to be articulated, yet they are certain to include measures to protect coal mining jobs.
Given the market forces that have slowly made coal mining less competitive, Trump will struggle to deliver policy that will do anything other than temporarily alleviate the industry’s pain. Trump cannot reverse global market trends and, given his dislike of government subsidies, it will be difficult for Trump to deliver meaningful change for mining communities – particularly as oil prices remain low. Ironically, Obama has already spent millions on trying to revitalise coal mining communities, and Clinton’s campaign plan included a USD30bn investment plan to provide healthcare to former miners by reforming the federal black lung benefit program, initiatives to retrain and upskill miners ready for new roles in the renewables energy sector, and repurposing mine lands and investing in infrastructure for new industrial purposes.
To deliver on his campaign promises, Trump will likely lift the Obama administration’s Interior Department moratorium on the issuance of new coal leases which has been in place since January 2016 and associated plans to reform the awarding of leases. This would benefit large coal producers such as Arch Coal and Peabody. The EPA is likely to lose some teeth and have its remit shifted.
Yet in reality, coal mining is not set to have a sustainable resurgence - even if natural gas prices rose rapidly. Coal-fired plants take almost five years to build and typically run for decades, so investors are unlikely to commit heavily to the sector even if Trump ends the ‘war on coal’ as there is no guarantee of coal-friendly future administrations. There are better investment opportunities available than waiting decades for a return on coal.
In addition, Trump cannot reverse the global shift towards a preference for greener forms of energy. Even China has articulated concern for its polluted air. Low energy prices may temporarily have stymied large scale investment in costly renewable energy, but even if the US began to export larger volumes of coal to emerging markets, this would only be a temporary solution and, higher US production costs would mean the US would struggle to compete with producers such as Indonesia, South Africa and increasingly Colombia.
During his campaign, Trump stated his intentions to reverse the Obama administration’s recent environmental reforms and regulations, but after that, the new President’s options will limited. Against hope, the protracted decline of the coal industry will continue. JLT Mining, a specialist international team dedicated to the mining industry, has a variety of services that can support US coal mining companies in these difficult times. Our Special Situations Group (SSG) focuses on providing executive risks solutions for mining companies undergoing a corporate ‘distress’ scenario.
We advise on issues such as collateral recapture, restructurings, and bankruptcy, in addition to advising on personal asset risks, trustee liability and cyber risks. Our team of former attorneys, bankers, consultants, and underwriters advise our mining clients through distress situations on a daily basis and help them understand how their risk transfer strategies must adjust during times of distress. Our experience translates into expertise, guidance and crucially, tangible solutions, enabling executive management teams to make strategic risk decisions.
For further information, please contact Harry Floyd, Partner, Mining on +44 (0)20 7466 1305 or email firstname.lastname@example.org