Coal Prices and Earnings (updated October 27, 2005)

This report summarizes prices from the weeks ended October 14 and 21. In the business week ended October 14, the Powder River Basin (PRB) average spot price surged up by 27 percent, from $12.42 to $15.78 per short ton, for the 8,800 Btu PRB coal tracked by the Energy Information Administration (EIA), for prompt quarter delivery. In the week ended October 21, the same coal gained an additional $1.11 and reached a high of $16.89 (see table and graph below). Meanwhile, as of the week-ended October 14, Northern Appalachia (NAP) spot prices lost $10.00 per short ton for prompt quarter delivery. The 11,800-Btu NAP rail coal fell to $44.00 per short ton, and remained at that level the following week. Other spot coal prices tracked by EIA were unchanged. Prompt quarter spot prices in Central Appalachia (CAP) remained at $62.00 per short ton, Illinois Basin (ILB) prices remained at $35.00 per short ton, and the 11,700-Btu Uinta Basin (UIB) coal average spot price remained at $37.00 per short ton (Coal Outlook, October 21, p 2). 

Average Weekly Coal Commodity Spot Prices Business Weeks Ended October 14, and October 21, 2005

1 Coal prices shown are for a relatively high-Btu coal selected in each region, for delivery in the "prompt" quarter. The "prompt quarter" is the next calendar quarter, with quarters shifting forward after the 15th of the month preceding each quarter's end. Source: with permission, selected from listed prices in Platts Coal Outlook, "Weekly Price Survey." Note: the historical data file of spot prices is proprietary and cannot be released by EIA; see http://www.platts.com/Coal/. >Analytic Solutions>COALdat, or >Newsletters> Coal Outlook.

Market Developments (updated October 28, 2005)

PRB spot prices have been trending up all this year, but the increases over the past 4 weeks represent a strong change in magnitude. To go from $6.20 to $10.19 per short ton – a $3.99 gain – took from the first week in January to the third week in September and represented a 64 percent rise. To increase from $10.19 to $16.89 per short ton – a $6.70 gain – took only until the week ended October 21, four weeks later, and marked a further rise of 66 percent. Spot prices occasionally spike up, only to revert to values at or near their earlier prices after a few weeks.

In this case, many coal buyers and sellers expect the prices to remain elevated because coal supplies and coal consumer inventories are tight at the same time as coal demand is increasing, and neither the tight coal supplies and inventories nor the increasing demand will resolve quickly. Since coal supply growth will come from a mix of reopened old mines, changes in ownership and new operating standards, and the financing and permitting new mines, that growth will develop largely over the next 2 or 3 years. Coal demand is likely to remain high as long as natural gas prices remain above $6.00 per thousand cubic feet (Blaney, J, Implications of New Air Regulations for Coal Markets at Platts Coal Marketing Days, September 26, 2005). International metallurgical coal demand is also expected to remain high over the next several years. Potential new coal demand is expected in industrial and combined heat and power applications and, with oil prices high, eventually in planned coal-to-liquid fuel plants. Morgan Stanley energy analysts Mark Liinamaa and Wayne Atwell noted that the surge in PRB prices may in turn support higher prices in other coal fields. “Until recently, PRB prices have been acting as a point of relief for high eastern prices. Recent PRB prices moves add support for the Northern Appalachia/scrubber case, longer-term increase in demand for Illinois Basin coals, as well as continued strength in Central Appalachian pricing. . .” (Coal Outlook, October 17, pp. 13-14).

Extremely low coal consumer stockpiles and record high prices for sulfur dioxide allowances may play a role in the divergent movements of recent PRB and NAP coal prices. Peak coal inventory levels, which are generally in place in May each year, were low to begin with in May 2005: 120.1 mmst, or 47days' supply, compared with 155.3 mmst, or 63 days' supply, in May 2002 (see graph below). EIA’s latest monthly survey of electric power generators indicated that coal stocks in that most important sector had fallen to 99.5 mmst, or 31days’ supply, at the end of August (see graph below). Recent trade reports estimate that coal-fired generator stocks have reached 30 days’ supply on average, and around 10 days’ supply in isolated cases. Stockpiles usually decline through September. This year they are expected to have declined more than usual based on above-normal cooling degree-days and high power generation rates. During the shoulder months of October and November, power producers rebuild coal inventories as much as possible. The ongoing need to replenish inventories is expected to keep spot and new contract prices firm through at least 2006.

On October 27, Evolution Markets reported settled transactions as high as $1050 per ton for 2005 sulfur dioxide allowances. There were no settled allowance prices for 2006, but the offer and bid prices were very close to those for 2005 – about $3.00 lower. High allowance prices and the near-term need for coal can be mutually reinforcing to some extent. As a result, there have been distressed spot purchases of low-sulfur coal at elevated prices and of high-sulfur coal at lower prices along with high-priced sulfur dioxide emission allowances.

The Buchanan mine remains idle following the malfunction on September 16 in the skip hoist system. Consol Energy indicated that the restart of the mine is expected around November 15 (Coal Trader, October 28, p 4). Buchanan normally produces 350,000 to 400,000 short tons per month of low volatile metallurgical coal. This is the second time this year that the mine is out of commission and "no meaningful inventories" were available from Buchanan at the time of the mishap. Meanwhile, rumors that the Pinnacle mine has encountered an offset or additional rock at the longwall face have had coke producers searching for low-volatile metallurgical coal, including from Grand Cache Coal’s Smoky River operation in far-off western Alberta, Canada (U.S. Coal Review, October 24, p 10). Jim Walter Resources in Alabama is planning to shift 1.8 mmst of Blue Creek seam production in 2006 from steam markets to metallurgical. The coal is from its No. 7 mine but the steam coal will be replaced in part with production from surface-minable reserves. The company sold met coal at an average of $75 per short ton in 1H2005 but was able to sell its production in 2H2005 for $104 per short ton. Its projections for 1H2006 are to sell 3 mmst at an average of $105 per short ton (SNL Coal Report, October 24, pp 5,6). Meanwhile, some spot purchases of NAP medium-quality, high volatile met coal were sold for $85 per short ton and multi-year contracts have been done for $85, and for $87 per short ton for higher-quality met coal (U.S. Coal Review, October 24, p 5).

After unusual growth in coal exports in 2004 (5.0 mmst over 2003), 1Q2005 exports were ahead of 1Q2004, but that pattern reversed in 2Q2005. (EIA, Quarterly Coal Report, Table 1, September 19). As a result, exports year to date at the end of June were nearly the same as in the same period of 2004: 24.93 versus 24.94 mmst. U.S. coal exports continue to be led by metallurgical coal, but the year-to-date totals are also very similar for met coal (15.25 versus 15.21 mmst in 2004) and for steam coal exports (9.68 versus 9.73 mmst in 2004). On the other hand, coal imports are up appreciably for the first 6 months of 2005: 14.84 versus 12.18 mmst in 1H2004, an increase of 21.8 percent.

The graph below, and its downloadable data file include data available through August 2005. They show quarterly average values based on coal cost data EIA collects from coke plants. It also depicts monthly average values declared for met coal brought to ocean terminals for export, from U.S. Customs data. The values reported include the costs of transporting the coal to the coke plants or export districts. Unlike most prices reported in coal newsletters, the values below are based on surveys of actual shipments. These prices are about 2 months old, however, when they are first available and do not address future prices. Because the prices below are averaged and include met coal shipments from multi-year contracts, traditional 12-month contracts, and not just spot shipments, variances are less extreme than in some spot price reports.

Click here to download Met Coal data files. (Excel Format)

Coal Production (updated October 13, 2005)

Estimated monthly coal production for September 2005 was 93.5 mmst (see graph below). That was almost the same - about 100,000 short tons less -- than the same month a year ago. It represents a 2.4 mmst decrease from August 2005 production. EIA estimates that year-to-date 2005 coal production (through September 30, 2005, versus September 30, 2004) was 841.1 mmst, a gain of 9.7 mmst, or 1.2 percent, over the 831.3 mmst in 2004. The net difference through the end of June results from 4.3 mmst more production west of the Mississippi and, notably, 5.5 mmst more coal east of the Mississippi. The rise in production east of the Mississippi is based primarily on EIA revisions to its 2Q2005 estimates based on second-quarter mine-level survey data, and on increasing estimated production in Appalachia in August and September.

The U.S. Monthly Coal Production graph (below) includes production based on final mine-level reports for 2004 by the Mine Safety and Health Administration (MSHA), and revisions to EIA estimates based on initial MSHA mine-level surveys for 1Q2005 and 2Q2005. The revised coal production for the first two quarters of 2005 was 562.1 mmst, based on completed MSHA data. That is 12.4 mmst, or 2.3 percent, more than in the first two quarters of 2004.

Note: This graph is based on MSHA-based revisions for all quarters of 2004, for the first and second quarters of 2005, and on preliminary EIA production estimates for July through September 2005. through July 2005.

Transportation (updated October 28, 2005)

In response to the low coal inventories reported by their customers, the Union Pacific and the Burlington Northern Santa Fe railroads revised the roadwork schedules under the 2005 Joint Line Maintenance Plan to allow more coal shipments through the end of October. The rebuilding will then resume around the clock until early December, but will affect only triple-tracked sections, causing much less delay than was typical in June through August (U.S. Coal Review, October 17, pp 1, 17).

Keystone Industries LLC announced plans to build a new dry bulk import terminal in Jacksonville, Florida. The goal is to import as much as 6 mmst of Venezuelan coal per year. The purchase of the site is scheduled for February 2006. Plans call for one Panamax-capable berth to be operating 18 to 24 months later, and a second berth could be added if warranted. Plans include a rail loop capable of loading 100-car unit trains. Rail carriers include Norfolk Southern, CSX, and Florida East Coast Railroad. The terminal would handle coal, petroleum coke, and possibly other commodities (SNL Coal Report, October 24, p 11).

Burlington Northern Santa Fe (BNSF) will convert its fuel surcharges for coal and agricultural hauls to a mileage basis on Janurary 1, 2006. BNSF executive John Lanigan characterized the new program as “more fair and equitable than the current percentage-based program (U.S. Coal Review, October 24, p 18).

In testimony at the October 19 hearing to review the 1980 Staggers Act, the Surface Transportation Board (STB) heard strong complaints from groups representing captive shippers. Many electric coops are captive to a single rail provider and “have unreasonably high rates and non-negotiable terms of service dictated to them on a ‘take-it-or-leave-it’ basis,” according to Glenn English, CEO of the National Rural Electric Cooperative Association. Mr. English said that better rail service and greater capacity should not “be accomplished on the backs of captive rail shippers.” Calling STB’s “rate reasonableness” review procedure arbitrary and prohibitively expensive to shippers, Mr. English concluded, “ Our membership asks in the strongest possible terms that the board take corrective action to implement the clearly expressed intent of Congress that mandated protections against monopoly power and transportation rate fairness. . .” The statement of the Alliance for Competition said implementation of the Staggers Act “has resulted in less competition due to Class I mergers and regulatory approval of paper barriers neutralizing the ability of smaller railroads to compete with the Class I railroads. . .(SNL Coal Report, October 24, pp 12, 13).

The view of the rail industry, enunciated in the Association of American Railroad’s (AAR) September 2005 position paper, “Destructive Railroad Deregulation,” states that calls like those above for changes to the Staggers Act would lead to less competition and higher rates. For example, the AAR asserts that the railroads’ use of “’differential pricing’. . . is the fairest, most-pro-efficiency, and most pro-competitive pricing system consistent with the continued viability of freight railroads. All shippers, including those who pay a higher markup, benefit from the differential pricing because it maximizes the number of shippers who contribute to railroads’ huge fixed and common costs.” The AAR concludes that, because of railroads’ enormous infrastructure costs, “If shippers with the greatest demand for rail service paid less because of regulation . . . costs would not be covered, and private capital would flee the industry,” with the result that taxpayers would eventually have to make up the revenue shortfall.

CSX railroad told the Surface Transportation Board (STB) that it will be positioned to handle additional western coal shipments moving east of the Mississippi by the end of 2005, when “significant investments” are completed to improve its St. Louis “Gateway” and its connecting routes. In a letter to the STB, Michael Ward, chairman, CEO, and president of CSX, said the improvements will allow CSX better to meet fall peak season demand by making it easier “to satisfy the demand of its utility customers for western coal.” Norfolk Southern (NS) chairman and CEO, David Goode, told the STB that NS coal volumes in 2Q2005 reached an all-time record high, surpassing the previous high set in 4Q2004. Goode noted that although NS utility customers’ coal stockpiles had improved over the past 6 months, current demand takes all available coal shipments, keeping supplies tight. Goode hoped that mine operators could further expand production. He also advised that new coal traffic flows present problems for the railroad. “The combination of new movements of imported coal on NS and the continued purchase of coal from non-traditional origins by NS-served utilities continues to challenge the traditional coal supply chain as distances from coal sources to coal consumption points lengthen and new origins fall outside normal empty coal car staging areas,” Goode said.

The Chinese government plans to open more coal mining capacity and shut additional small and illegal mines between now and 2007. According to Reuters (September 15) investment in coal mines rose by 82 percent in the first 8 months of 2005. If the expansion is successful, China could again become a net exporter of coal. In the meantime, high demand internationally for coal has helped to keep coal prices high and supplies committed. With the cooling of growth in the Chinese steel industry earlier this year, ocean bulk carrier rates declined. In August, however, China’s crude steel output hit a new record, up by 30 percent year-on-year to 30.5 million (Metric) tonnes. In September, the crude steel output nearly matched the record high, reaching 30.4 million tonnes. These compare with 29.2 million tonnes in July and correspond with intentional drawdowns of iron ore stockpiles (Simpson, Spence & Young, October 19, Website News). The use of iron ore stocks meant that China’s demand for bulk carriers had not yet affected rates, but that ore should need to be replaced within the year.

International ocean shipping rates have begun to rise. Since July 30, when coal shipping rates from U.S. Gulf ports to the ARA (Amsterdam/Rotterdam/Antwerp) European gateway reached $11 per tonne, they had risen to nearly $17.00 by October 7. Similarly, averaged rates from Hampton Roads to Japan, via 150,000-tonne Capesize vessels, having fallen to $22.50 in late July, rebounded to $36 per tonne by October 7 (Simpson, Spence & Young, Resources, Free Charts, accessed November 1). International demand for metallurgical coal has also risen since a mid-summer lull, and Indian steam coal demand continues to grow. The recent permanent shutdown of the U.S. Steel No. 3 coke battery at the Gary facility and the shortage of U.S. low-volatility met coal have U.S. steel producers looking for coke supplies. Chinese coke batteries have meanwhile been producing excess coke again and have lowered prices by $100 cumulatively in 2005. Non-premium Chinese coke was recently available for $125 per tonne, f.o.b. dockside. Even with ocean shipping costs, coke at that price is less expensive currently than domestic coke, according to some U.S. buyers, and may spur more coke imports by U.S. customers (U.S. Coal Review, October 24, pp 5, 15).

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