Spot prices of low-sulfur CAP coals have risen steadily since the week ended June 21, 2002, when the EIA-indexed coal sold briefly for a low $26.50 per short ton. That rise in CAP coal prices coincides with a dawning recognition among CAP coal buyers that recent supply problems may persist, at least temporarily. In addition to depletion of individual reserve blocks and the geologic problems that develop when mines approach the limits of minable coal, some new contracting is stymied by the five largely CAP coal companies in bankruptcy proceedings and as American Electric Power’s coal properties—chiefly assets acquired from bankrupt Quaker Coal Co. in 2001—are still up for sale after proving to be a drain on earnings (Coal Age, “Official: AEP Coal on Block,” June 2003). Those six companies in 2002 produced 71.3 million short tons (mmst) an amount equivalent to 28.7 percent of CAP production that year (“Survivability? Thrivability!” presentation by Jonathan Barr, Arch Coal, Inc., at Platts Coal Marketing Days, September 22-23).

The CAP price is now $0.80 above the $35.00-per-short-ton minimum f.o.b. mine price that major coal producers earlier this year called essential for new contract sales and to rationalize reopening of idled mines. Although the spot prices are up, producers report that buyers have been reluctant to contract for term coal. Many more solicitations have been issued, reportedly, than have been completed as contracts (Coal Daily, September 15, pp 5-6). Producers now expect to see some additional term coal contracts this year but expect other buyers, betting on a their current stocks and a mild winter, to put off new commitments to early 2004.

In addition to the problems with bankruptcies, reserve depletion, and geologic problems, CAP producers have been contending with longwall moves and permitting and litigation delays for new mines. PRB spot prices have risen more slowly than CAP prices, but the PRB producers were able to increase output if and when demand warrants and prices are right. Because of lower incremental mining costs, recent PRB spot prices, at $5.70 per ton in July (and at $7.25 to $7.10 in the past 2 weeks) needed only to rise by $0.50 or $1.00 to significantly improve profits for PRB producers. On the other hand, even if higher PRB prices indicate growing buyer interest in securing or supplementing this winter’s supplies, additional coal may not be easily had. As one PRB producer told U.S. Coal Review (September 22, p. 7), “We’ve done everything we can,” including “some pre-shipping in the first half,” but “there’s no more room to put more railcars in there.” Further, if the past is a guide, further spot and contract demand for PRB coal in Eastern markets may develop only after prices for CAP coal have become entrenched at levels buyers consider restrictive.

In the over-the-counter (OTC) coal markets, pricing has been unusually bullish. OTC transactions are arranged quickly, via brokers, and include both deals that will close in the short term with physical coal delivery, and financial deals used to hedge against future price changes. Although currently representing less than half as much volume as spot coal sales, the OTC market tends to react rapidly to perceived changes in future prices or availability. Sometimes the OTC prices anticipate changes in spot and, eventually, term coal contracts, but traders can be wrong in regard to the magnitude or the timing of price changes, or both, or even in regard to the direction.

Coal supply transactions on the NYMEX have stagnated with virtually no trades settled since June 24. After April 4, 2003, when NYMEX moved its coal futures trading from open outcry to it electronic trading platform, no significant changes occurred in either trade volumes or prices. Near-month settlement prices rose gradually from $28.00 per short ton to $32.20, where they remained during the first 3 weeks in June—a pattern similar to activity earlier this year. Volumes from April 4 through June 24 averaged between 100 and 300 transactions per week. Trade volumes have been at zero every day since July 2 for the near month as well as for downstream contract dates. Near-month settling prices rose sharply, however, from $33.75 per short ton on August 21 to $37.25 on September 2, before subsiding. The latest final price was $36.10 per short ton, with no transactions.

Coal Production (updated October 3)

Estimated coal production for the week ended September 27 was 21.2 million short tons (mmst). This was 0.3 mmst, or 1.3 percent lower than in the previous week and 3.6 percent below the comparable week in 2002. Year to date U.S. coal production, which incorporates both first and second quarter production data from the Mine Safety and Health Administration (MSHA), is estimated at 793.6 mmst, or 2.4 percent behind the corresponding total for 2002. West of the Mississippi, 2003 production is behind 2002 by 0.5 percent, while east of the river it is behind by 4.8 percent, year to date. Wyoming production (of which 96 percent normally comprises the PRB) is currently estimated as 275.0 mmst, cumulative through September 27. Wyoming year-to-date coal production is 0.7 percent ahead of the equivalent 2002 period.

The graph of U.S. Monthly Production below includes monthly coal production estimates for the first eight months of 2003. January through June are revised production estimates using second-quarter mine-level reports from the Mine Safety and Health Administration (MSHA). Production for July through August is from preliminary EIA estimates. The January through August U.S. estimates for 2003 total 711.1 mmst, or 2.4 percent behind the same period of 2002. One month earlier, the January through July estimate was 2.8 percent behind the same period last year.

Coal Imports (updated October 3)

There was a time when U.S. coal producers worried that imported coal might threaten the domestic industry. Times have changed. Several large U.S. companies today own shares in foreign coal mines and sell imported coal in the United States and other countries. From the customer’s point of view, imported coal has been an option for power plants or industries situated well for delivery-- usually at attractive prices—but some have been reluctant, or found infrastructure lacking in the tidewater. This year there seems to be increased discussion of the import option among coal buyers, as supplies of Central Appalachian (CAP) coal have diminished and prices have increased

The timing of domestic customers, for the near term at least, was not good. Prices for international coals for the European market rose steadily this past summer, followed by rising shipping rates, as the long, hot summer in Europe spurred coal demand. First South African coal sold out for the year; now it appears South American coal is no longer available. Southern Company learned last week that it responded too late to an offer of South American coal for 2004 delivery, from major U.S. producer, Drummond Coal Company. In fact, Drummond, Glencore, and perhaps Cerrejon are fully committed for the rest of 2003 (U.S. Coal Review, September 29, pp 1, 13). Some eastern power generators may have been considering picking up imported coal to replace some of the CAP coal that is in short supply.

Ironically, taking the longer view, Ernie Thrasher, President of AMCI Export Corporation, explained why the U.S. coal industry should welcome the still-limited inroads made by coal imports in recent years (Imports—Threat of Opportunity?? at Platts Coal Marketing Days, September 22-23). Initially, consumers gave Colombian, Venezuelan, and Indonesian coals a second look because of good prices, because they offer low- and very low-sulfur products, and because they offer some supply diversity during concerns over CAP reserve base. Prices are up and currently more volatile in international coal markets, but the low-sulfur coals from South America and Indonesia can in the longer term help keep some domestic mines producing. The two coal types can be blended to “manufacture” blends that meet the emission limit of 1.2 pounds of sulfur dioxide per million Btu, or just to keep it within ranges covered by emission allowances. Because of their Btu levels, some imported coals also react well in reducing nitrous oxide emissions. Mr. Thrasher noted that imports can help assure customers that sufficient quantities and qualities of coal will be available to meet environmental requirements. As a result, operators are more likely to stay committed to burning coal in their power plants.

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Contact(s): Rich Bonskowski
                  Phone: 202-287-1725
                  Fax: 202-287-1934
                  e-mail: richard.bonskowski@eia.doe.gov

                  Bill Watson
                  Phone: 202-287-1971
                  Fax: 202-287-1934
                  e-mail: william.watson@eia.doe.gov