Coal Prices and Earnings (updated August 31, 2004)

In the business week ended August 27 there was one change in the spot coal prices tracked by EIA. The Northern Appalachian spot price increased by $2.50 per short ton, to $47.00. Previously, in the week ended August 13, the Central Appalachian (CAP) price indexed by EIA had surged by $4.50, to $64.50. With the exception of the CAP and NAP coal, the average spot coal prices tracked by EIA remain unchanged— at this point, for six or more weeks in a row. Rising prices in the eastern U.S. market reflect continuing short supplies of low-sulfur eastern bituminous coal and pressure on alternative coal supplies.

PRB coals continue to sell at relatively stable prices. Major PRB producers, and some financial analysts, are confident that the product will make new, permanent inroads with traditional eastern coal customers and have set higher production targets for 2004 than in 2003. In the face of rising prices in other supply regions, one explanation of stable PRB prices of late is the time and investment required of most eastern coal customers to switch to PRB coal. While using remaining stocks of eastern coal, power producers have had to convince investors that the costly conversion to western coal is truly warranted. Another explanation is uncertainty that the rail transportation system, already committed to multi-track “24/7” unit trains traversing the region all year long, can continue to increase annual coal deliveries. Meanwhile, PRB producers themselves, aware of the immensity of the potential contracts, may feel that low, stable prices right now are a reassuring selling point for operators considering switching to their product. Recent spot market customers apparently believe that prices will rise—Platts Coal Outlook (August 30, p.2) reports sales at $6.70 and $7.45 per short ton, respectively, for deliveries in the first and second quarters of 2005.

With high spot coal prices holding or rising, recent term contract prices are reportedly higher than in recent years for coal in the East, Illinois Basin, and Uinta Basin. Some mines that were temporarily closed or curtailed have come back on line and bankruptcies among several bituminous coal producers are reaching resolution. Rising oil prices, signs of a recovering economy, and growing electricity demand set an operating climate with firm price floors and tight coal supplies during the coming months.

Eastern bituminous producers that can utilize more thorough coal preparation to produce good metallurgical coal are tapping into exceptionally high selling prices in the export market, and also benefiting from relatively favorable U.S. dollar exchange rates. Arch Coal, for example, bolstered profits for the second quarter of 2004, in part with a 70 percent increase in coal sold in the metallurgical market, compared with the second quarter last year. Jim Walters Resources, a traditional met coal supplier, saw operating income from coal sales for the second quarter of 2004 that was 48 times higher than the same period last year, thanks to “favorable pricing from metallurgical coal
. . . sales, plus higher coal production.” The company is optimistic about further improvement in the second half of 2004 (Coal Outlook, August 2, pp. 8, 10, 11).

In a break with long-established practice, low-volatile metallurgical coal consumers are now negotiating 2-year or longer contracts in order to lock in some assurance as to future operating costs (U.S. Coal Review, July 12, p.1). Metallurgical coke is made from blends of coals, all of which are bituminous in almost 100 percent of the blends. Low-volatile bituminous coal is a mainstay for many met coke producers (depending on coke-making technology) but it enjoys few other marketing options because, unlike high-volatile bituminous coal, low-volatile bituminous is not usable in most steam-electric boilers. Producers of low-volatile met coal are currently able to sell their product for $75.00 to $80.00 per short ton, f.o.b. mine for the coming 12 months. It is prices at that level that may be driving customers to agree to longer-term agreements in exchange for a break on current spot prices.

Coal Production (updated August 9)

EIA estimates year-to-date coal production of 638.3 million short tons (mmst), through the week ended July 31, 2004. That is roughly 17.1 mmst, or 2.8 percent, ahead of the same period last year. The net increase, however, is almost all attributable to production west of the Mississippi River, which is 14.7 mmst higher, year to date, than in 2003. East of the Mississippi, production has risen during June and July in response to increased demand , with year-to-date production moving ahead of the same period in 2003 by 0.9 percent (2.4 mmst). The latest monthly production comparisons (see below), for July 2004 versus July 2003, revealed a 2.2 mmst increase, which equates to 1.8 percent more production last month than in July 2003. Estimated coal production for the first 7 months of 2004 totaled 638.3 mmst, which is 17.1 mmst, or 2.8 percent, ahead of the revised production for the first 7 months of 2003.

Note: This graph is based on revised MSHA coal production survey data for quarters 1 through 4 of 2003, new revisions for quarter 1 of 2004, and preliminary EIA production estimates through May 2004.

In the East, rail delays attributed mostly to CSX trains, have sent coal producers to river barges where possible, with the result that barge lines are at or near capacity and the usual healthy difference between rail and less expensive barge rates has nearly evaporated. In the same region, strict enforcement of Kentucky’s coal truck weight limits has cut the size of hauls by 40 to 50 percent. Some truckers have parked their trucks and stopped hauling while others are demanding, and getting, 50 to 55 percent more to haul eastern Kentucky coal to river docks or rail loadouts. The result is to add to the delays of rail and river deliveries of coal from that part of Central Appalachia.

Part of the difficulty stems from measures the railroads applied in 2001, when their loadings and revenues shrank with the economic recession. Workforces were reduced, in some cases through early retirement offers. Union Pacific ended up losing more senior employees than anticipated. On July 8, Union Pacific announced that a recent hiring of 3,200 new train operators, who entered its 6-month training regime, and its acquisition of 500 new locomotives over the past 9 months will not be enough to cure their service problems (Railway Age, Late Breaking Rail Industry News, July 9). The company also plans to hire 5,000 service employees and add 300 more locomotives during the rest of 2004, as well as speeding up delivery of 125 other locomotives (St. Louis Post-Dispatch, “Missing out on the gravy train,” July 15).

Because of the large deficit in equipment and personnel and the time needed to train new hires and get new equipment, it is likely that delivery delays for coal will persist for at least the rest of 2004, assuming the economy continues to grow. CSX Transportation plans to hire 1,400 new train and engine service employees and add 120 locomotives this year, and to hire an additional 2,100 employees in 2005. Norfolk Southern Railway, which was better prepared for the increases in rail demand, expects to hire 1,500 train and engine service employees this year (The Washington Times, “Freight shipping lags amid economic surge,” July 14). Confirming that personnel shortages are not the only factor in the delays, rail freight levels are up 5.3 percent for the first 6 months of 2004, compared with the previous record highs set during the same period of 2003.

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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