Special Report: Can Trump Save the Coal Sector?

Every presidential nominee talks big, and no one talks bigger than President Donald Trump.

Coal was a marquee topic for him, both on jobs and what was going wrong in the country, namely that regulations were killing jobs and the businesses themselves.

Now, we're facing the point where elected officials always disappoint. It's time to follow through.

Of course, Trump is hardly your normal politician. I have no doubt that Trump will do what he can to bolster coal, but his ultimate success depends on a lot of factors.

We have to consider where coal is now, how a president can help, how much Congress and the Senate will get behind him, and how the coal sector will respond.

Let's dive in and see what Trump can do for the sector, its workers, and ultimately, what it will mean for coal in the years to come.

Dire Straits

If you've been keeping up with the state of the coal sector in recent years, you know it ain't pretty.

The jobs are mostly gone, retired coal workers are losing their pensions and benefits, and companies are being destroyed.

Production is at a 30-year low. In just the last year or so, production is down 20%, marking the largest annual decline in about 60 years.

Just a decade ago, coal accounted for half of U.S. electrical generation. Now, it accounts for about a third with natural gas surpassing it.

Bankruptcies are affecting a huge amount of U.S. coal production. Peabody Energy, the largest coal miner, filed for Chapter 11 protection in April. Arch Coal, No. 2 in production, did the same in January.

According to EIA figures for 2015, the two companies accounted for 34.2% of U.S. production.

Before that, it was Alpha Natural Resources, Walter Energy Corp., and Patriot Coal in 2015, along with a slew of smaller names in the sector.

The entire sector is drowning in debt and going through a cycle of wealth destruction that's typical for a generational trough in commodity stocks.

If the coal sector isn't going to languish and be forced to essentially reinvent itself on a much smaller scale in the U.S., it definitely needs an intervention.

In short, Trump couldn't have picked a darker time for the coal sector. But the companies are in dire straits and need a lot of help to get back to anything resembling a healthy state.

Saving the Jobs and the Workers

Thousands of jobs have been lost over the last year with more to come, leaving about 55,000 miners in the U.S.

The Senate barely let a temporary four-month extension of retired coal worker health benefits pass earlier this year. The 16,000 workers came from now bankrupt Illinois mines. Many of them worked for Peabody Energy or its 2007 spin-off, Patriot Coal.

For better or mostly worse, this is how things are supposed to be in these kinds of situations — at least as far as how our society has set the rules.

The law and court precedents are designed to dissolve and strip liabilities and also salvage what is left. Equity is destroyed and bondholders end up owning whatever is left.

In the hierarchy of people standing in line to get what they're owed, labor liabilities are considered “junior liabilities” behind banks and bondholders and on par with environmental costs.

So, unless workers are also bondholders — not even common shares will suffice — the system is essentially designed to leave them with nothing. Only through federal pension protection laws or agreements during company acquisitions are any benefits left intact.

For example, Arch Coal emerged from Chapter 11 protection after 93% of its debt was removed. It resumed trading on the NYSE under the same name and ticker, but it is functionally a new company that owns old assets.

If Trump is going to do something to help the workers, he'll have to introduce new laws and protections. Without stepping in, things will only get worse for coal workers, present and past, as these bankruptcies pan out.

For Trump to follow through on his promises to support the coal sector and get miners back to work again, two things will have to happen:

1. Trump, Congress, and the Senate would have to enact legislation to protect coal worker benefits in some form.
2. Production needs to expand to make coal companies healthy and to support hiring.

As we talked about earlier, the bankruptcy system, as it's set up, won't do much — if anything — for laid-off coal workers. They're out in the cold.

Congress is filled with members who find government intervention and handouts absolutely untenable, and that is what a quick and decisive improvement in their fortunes would have to be.

Realistically, what we'll probably see is a limited package that's aimed at retaining some level of pension and health benefits for currently retired coal workers, coupled with an emphasis on job creation for working-age unemployed miners.

This is something that's easier to swallow. And even if it isn't revenue neutral, a bit of smoke and mirrors could be used to keep up appearances.

As for the job-creation aspect of any plan, rolling back EPA regulations and scuttling the Clean Power Plan will happen, along with some form of tax relief.

Killing the Paris Climate Agreement will probably happen, as well. But it could also just be ignored for the same effect.

Tax relief and limited liability for environmental cost will definitely be in there, too, even if it's quietly done to avoid the appearance of pandering too much to big business.

The combined effect will be security for retirees, reduced bottom-line costs for companies, and improvements to company margins that will support a top-down approach to job creation.

Toss in some localized handouts to secure votes and you have your bill.

Then there are the more extreme options that just don't make sense for Trump or the Republican legislative branch to support but could happen in theory.

Subsidies that would probably be illegal under international law and a TARP-style bailout come to mind. I think we could all agree that the odds of those are pretty low. The Freedom Caucus in Congress has already positioned itself as an opponent to anything other than the most fiscally stringent and conservative plans.

But you never really know. Congressmen need votes, after all, and most will do whatever it takes to secure those before standing purely on principle.

So, Can Trump Save Coal?

We have a decent (if pretty simple) rundown of the lay of the land and what can be done. But is it enough, and can Trump pull it off?

Unfortunately for him, coal workers, and the coal sector as a whole, it appears that he could help in the short term, but he couldn't do nearly enough. Not without major market forces that he cannot influence.

What Trump has not acknowledged is that there is a very real existential threat for many coal-mining companies and thus for the jobs he wants to create.

It's what has been stealing market shares from coal all these years — natural gas.

Without higher natural gas prices, coal can't (and will not) compete. The price mismatch is simply too great, and the capacity for the rapid expansion of natural gas production in response to higher prices already exists.

Even solar, long more expensive, is providing cheaper energy without subsidies in Texas and the Southwest through utility-scale projects.

Killing regulations will reduce the cost of doing business for coal miners. This is undeniable. It would also allow the companies to extract more coal, meaning more jobs.

Coal-extraction prices would drop, margins would improve, and we'd probably see more competitive prices for U.S. coal in international markets, which would result in greater sales overseas, as well.

Yet, nothing that Trump or the U.S. government can do will address the broader energy market.

Production has been falling for 30 years because coal-mining companies can't sell it for enough to justify mining as much or more of it — hence decades of job losses and coal finally hitting prices that made coal-mining companies insolvent.

Increasing supply would only make the pricing problem worse. The only way to produce higher, economically feasible coal prices with an increase in supply is with an even greater increase in demand.

This is hardly something that the U.S. government can do on a domestic level without an incredible level of market intervention, which no one would find palatable let alone legal.

There is no real lasting, long-term improvement for companies or miners without a complete reversal of domestic and international demand for cheap natural gas, too.

Share prices will surge short term as announcements are made, only to wither away as reality is reflected in quarterly earnings statements.

It will take changes in the entire international energy market to reverse the decades-long trend that has been and will keep happening.

As willful and powerful as Trump may be with both houses behind him on this issue, it won't be enough. No one could do it. It is too large of a problem for any government to tackle.

There is a silver lining buried in there, though. Trump and Congress can work around the margins to help ex-coal workers, keep some jobs in place for a while longer, and cushion the blow of future job losses.

It ain't much, but it's something. And it may mean everything to the coal workers who are being left out in the cold.


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