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Tension with Canada could target US coal; Trump's coal push finds momentum

This week, rising tensions with Canada cast a possible shadow over U.S. exports northward, while the president's most recent push to save coal and nuclear power plants found long-sought momentum in the administration's direct engagement.

After a series of tense trade discussions between the U.S. and Canada, industry experts warned this week of the potential impact the heated rhetoric could have on an improving U.S. coal sector — an industry supportive of the administration and often praised by President Donald Trump.

About 5.3 million tons of U.S. coal was exported to Canada in 2017, according to U.S. Energy Information Administration data. The figure represented about 5.5% of U.S. coal exports during the year as increased export demand has buoyed an industry with a domestic customer base in secular decline.

Meanwhile, the Trump administration's most recent effort to boost the industry found new momentum, with some analysts predicting that a monthslong push to support older coal-fired and nuclear plants could come to fruition thanks to political will in Washington.

While the administration's previous attempts to subsidize older coal and nuclear plants have failed, market observers say Trump's increased engagement in the issue, coupled with indications the U.S. Department of Energy is willing to go around entities that traditionally manage electricity markets, may indicate support is coming soon.

"We are skeptical about the long-term legality of the subsidy plan, and details are still hazy about the scope and magnitude of the subsidies," wrote Katie Bays, lead energy analyst with Height Securities LLC, in June 4 commentary. "However, it's increasingly clear that political will is behind the subsidy program, legal footing notwithstanding."

If successful, this push to revive older plants would be welcome news to coal producers who have seen longer-term contracts with utilities evaporate in recent years amid uncertainty and competition from low-cost natural gas. This week, an S&P Global Market Intelligence analysis of EIA data for 2017 showed that just 21.3% of the coal sold to electricity generators last year was delivered on contracts with more than three years remaining at the time of delivery.

"The reality is the industry has changed massively from where it was five or six years ago when utilities used to know what they were going to burn through their coal plants and would buy accordingly," Cloud Peak Energy Inc. President and CEO Colin Marshall said on a call with analysts in April. "There is a lot more variability, which is what we're coming to terms with."

Warning of the cost of inaction on the part of the administration, one of the nation's largest rail lines said this week that without direct orders from the president or U.S. Congress, it is unlikely new coal-fired power plants will be built in the United States.

CSX Corp. is doing "everything we can" to work with coal miners and power plants, the company's executive vice president and CFO, Frank Lonegro, said at a transportation conference in New York City, but the company still views the U.S. coal sector as being in long-term decline.

This week, the EIA lowered its 2018 forecast for U.S. coal's contribution to the nation's electricity, from 28.7% to 28.1%.

The industry decline continued to weigh on some U.S. producers this week, with S&P Global Ratings downgrading Bowie Resource Partners LLC, suggesting the company could face a liquidity shortfall in the next year if it fails to extend its revolving credit facility.

This week, the city of Oakland made good on its pledge to appeal a May ruling reversing its ban on coal traffic through the city, formally filing its response on June 13. The appeal, unanimously supported by the City Council, is in response to a May 23 ruling by U.S. District Judge Vince Chhabria, who found that the ban did not "contain enough evidence to support the conclusion that the proposed coal operations would pose a substantial danger to people in Oakland."

An administration decision to cancel a study into the health effects of mountaintop removal mining came under fire this week after the U.S. Department of the Interior's Inspector General said the agency was unable to provide "specific criteria" for how it concluded the million-dollar project should be halted halfway through.

EMLF: The Energy & Mineral Law Foundation will hold its 39th Annual Institute on June 17-19 in Nashville, Tenn.

American Coal Council: The council will host a webcast titled "Renewables and Coal: Results of EIA Annual Energy Outlook 2018 Alternate Policy Cases" June 19 at 2 p.m. ET.

S&P Global Market Intelligence and S&P Global Ratings are owned by S&P Global Inc.