Coal Prices and Earnings (updated March 30)

Spot coal prices in the East have been rising steadily since Labor Day 2003, with rapid escalations since the end of November. Premium Central Appalachian compliance coal spot prices (see graph below) passed the $45.00 per short ton level in the week ended February 13 and passed the $55.00 mark 3 weeks later (week ended March 5, f.o.b. barge, for actual delivery in the prompt quarter). That same week, medium-Btu Pittsburgh seam bituminous coal, cleaned to less than 3 percent sulfur, passed the $45.00 per ton mark, f.o.b. in Northern Appalachia. Spot prices have also climbed in the Illinois Basin and Uinta Basin, alternate sources for bituminous coal.

There is no single cause, but a number of industry, market, and external circumstances have put upward pressure on coal prices since last fall. The common concern, heard from coal consumers throughout the East and Midwest, is a severe crimp in the coal supply chain. Coal availability is short for both spot purchases and term contracts, but in a rising market, as in recent months, spot bids exhibit the more dramatic price spikes.

• Requests for low-sulfur bituminous coal in Central Appalachia, the major source of Eastern compliance coal, have gone unanswered or come in well above expectations
• Northern Appalachian high-Btu, mid-sulfur bituminous coal (usable in plants with emissions scrubbers) is also in short supply and up in price
• Powder River Basin (PRB) low-sulfur, low-Btu compliance coal, which could replace or supplement Eastern coal at some boilers, is largely under contract for 2004 and 2005 deliveries; it is used by many Midwestern power plants that switched fuels in the 1990’s from higher-sulfur Interior and Appalachian coals
• Spot purchases from the PRB and from the low-sulfur bituminous Uinta Basin are constrained by a lack of spare railroad capacity to handle increased shipments

A number of factors have converged at this time and contribute to the coal supply and coal price changes:

• Over the past 2 to 3 years Eastern productive capacity, especially that using lower-cost mining techniques, was hampered by regulatory issues, permitting delays, and related lawsuits over mountaintop removal, valley fill, and mined land subsidence
• Readily minable reserves have diminished: although the single-year productive capacity of U.S. coal mines has increased, the duration of coal production from active mines has declined and become concentrated in fewer companies; from 1991 through 2002, productive capacity increased by 9 percent, but reserves at producing mines went down by 17 percent; in 1991 all reserves at operating mines equated to 22.1 years’ production, but by 2002 that figure was 16.6 years
• The decline in overall operating reserves means that an increasing number of individual mines are approaching the limits of useful mine life; Eastern mines increasingly report “geologic problems,” which often portend the end of minable reserves as faults, weak roof, or thinning or splitting coal seams raise costs or impair mining with existing machinery
• Mine operators deferred new mines in recent years because future reserves tend to be in deeper, thinner coal; new mines will be costlier to operate and will require large capital investment and firm sales contracts at higher coal prices
• During 2003 and 2004, several eastern mines were temporarily closed due to fires, accidents, or safety issues; examples include RAG’s Cumberland mine, Pin Oak Resource’s Pinnacle met coal mine, Alliance Resource Partners’ Dotiki mine, and Consol’s Buchanan mine, which together comprise nearly 3.9 million short tons (mst) of lost production
• Five major coal company bankruptcies in the past 24 months—four still in process—were preceded by or resulted in missed or slowed deliveries, coal price increases, and some abrogated contracts that customers had to re-bid; they include Horizon Natural Resources, formerly AEI Resources, the fourth largest U.S. producer of bituminous steam coal. Failures of reclamation bonding companies also put some operations on hold
• In West Virginia, new regulations and licensing of coal truck load limits affect cost and timeliness of coal movements to customers and loading docks
• Meanwhile, PRB mine capacity is heavily committed for 2004 and into 2005; railroad capacity, though enormous, is a limiting factor and relies on trains rolling 24 hours per day, 7 days per week. If deliveries fall behind optimal rates—as they did in early 2003 when electricity generators slowed deliveries to burn off inventories—there are few options to accelerate deliveries later on.

Numerous external factors have also exerted upward pressures on coal prices:

• High natural gas prices over the past year shifted some demand to coal
• Oil prices are still rising, which drives up costs of mining and shipping coal
• Delivered coal prices skyrocketed in international coal markets due to heat and drought in Europe in 2003, withdrawal of Chinese coal and coke from markets, and extreme demand for bulk carriers by booming Chinese steel industry
• The Atlantic Ocean market bid up and contracted for excess Colombian coal that some coastal U.S. power plants had considered a primary or back-up coal source, further reducing supply.
• After several years of declining U.S. exports, the hot international market and weak dollar are diverting Appalachian high-Btu steam coal and low-sulfur metallurgical coal to the export market

Coal Production (updated March 16)

View Earlier Coal News and Markets Reports

Contact(s): Rich Bonskowski
                  Phone: 202-287-1725
                  Fax: 202-287-1934
                  e-mail: Richard Bonskowski

                  Bill Watson
                  Phone: 202-287-1971
                  Fax: 202-287-1934
                  e-mail: William Watson