Coal Prices and Earnings (updated September 20, 2004)

In the business week ended September 17, following the upward spike of 1 week earlier, the spot coal prices for Northern Appalachian (NAP) coal were sustained at record levels. In the business week ended September 10, the NAP coal indexed by EIA had increased by $16.00, or a full 34 percent, to $63.00 per short ton.

Factors that may have contributed to the high prices include: predictions for a “strong winter burn” at electric power plants this year; continuing shortages of low-sulfur bituminous coal; a consequent increase in purchasing of higher-sulfur coals in recent weeks; a downward drift in NOx allowance prices throughout the week ended September 10, along with a weakening at the beginning of the week in sulfur dioxide allowance prices (which many feel will soon be trending back up) (Argus Coal Weekly, September 10, pp 5-6); and strong, growing international price competition for metallurgical coal (Coal Outlook, September 20. pp 1, 15). In addition, Consol Energy’s announcement in late August that third quarter production goals would not be met owing to operational problems, was followed by a similar notice on September 8 by Massey Coal’s CEO, and included the news that Massey’s projected 2005 coal production is already nearly all committed (Coal Outlook, September 13, p 10). Consol is the leading producer of NAP coal and Massey holds that honor for Central Appalachian (CAP) coal.

Except for Illinois Basin (ILB) coal, the other spot coal prices tracked by EIA were unchanged. The ILB coal indexed by EIA rose $2.00 per short ton over the previous week’s average price, to $35.00. The average Uinta Basin and Powder River Basin (PRB) spot coal prices tracked by EIA have remained unchanged for 9 or more weeks in a row. High 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.

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. Eastern bituminous producers converted or resold much of their production into the more lucrative metallurgical coal export market, made possible in part by relatively low U.S. dollar exchange rates. Market analysts expect international met coal prices to remain high for the rest of 2004 and well into 2005. Arch Coal 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 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 able to sell their product for $75.00 to $80.00 per short ton or higher, 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 September 20)

EIA estimates year-to-date coal production of 769.8 million short tons (mmst), through the week ended September 11, 2004. That is roughly 24.6 mmst, or 3.3 percent, ahead of the same period last year. Of the net increase, 15.4 mmst are attributable to production west of the Mississippi River. East of the Mississippi, production since June has risen in response to increased demand, with year-to-date production now 9.2 mmst ahead of the same period in 2003. The latest monthly production comparisons (see below), for August 2004 versus August 2003, revealed a 5.5 mmst increase, which equates to 3.2 percent more production than in August 2003. Estimated coal production for the first 8 months of 2004 totaled 733.2 mmst, which is 23.0 mmst, or 3.2 percent, ahead of the revised production for the first 8 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.

During the month of August, rail coal delivery service actually improved. Of the four major coal-hauling railroads, Union Pacific, Burlington Northern-Santa Fe, and CSX increased their average velocity during the four weeks ended August 27, with only Norfolk Southern slowing slightly (Argus Coal Weekly, August 27, p 9). Changes in velocity, or average train speed, indicate whether or not railroads are improving their capability to meet expected delivery schedules. Recently, delays in coal distribution have been a significant source of concern. Arch Coal, the second largest U.S. coal producer, reported that railroad delays and missed shipments, along with curtailed production due to flooding in Central Appalachia, cost the company $8 million in the second quarter of 2004. The shipping problems affected Arch's West Elk mine, as well as Oxbow Mining's Elk Creek mine and Appalachian Fuel's Bowie No. 2 mine, all in Colorado and all served by the Union Pacific Railroad (Coal Outlook, July 19, pp.9-10). Peabody Energy, the largest U.S. coal producer, experienced its own rail transportation delays during the second quarter, but they are reported as “resolving.”

In the East, rail delays attributed mostly to CSX trains, in recent months sent coal producers to river barges where possible, with the result that barge lines were at or near capacity and the usual healthy difference between rail and less expensive barge rates 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 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. In the past month of so a number of customers in Central Appalachia have chosen to expedite delivery speed by skipping the barge or rail link and paying the higher rates to have coal trucked from the producer to their facilities. As a result, diversion of trucks to direct delivery has left the barge docks in the region seriously depleted of incoming coal (U.S. Coal Review, September 6, p 12).

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.

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