Week of January 21, 2005 |
For
the business week ended January 14, the following average spot
coal prices were added: |
|
Central Appalachia (12,500 Btu, 1.2 SO2) | $65.00 per short ton, no change |
Northern Appalachia (13,00Btu <3.0 SO2) | $57.00 per short ton, no change |
Illinois Basin (11,800 Btu, 5.0 SO2) | $35.50 per short ton, no change |
Powder River Basin (8,800 Btu, 0.8 SO2) | $6.20 per short ton, no change |
Uinta Basin (11,700 Btu, 0.8 SO2) | $29.00 per short ton, no change |
Assessments of late-December spot coal sales by coal market trackers varied widely, which likely means that no clear trends had emerged at that time. The Platts Coal Outlook spot prices (above) since December indicate minor softening of immediate demand for NAP coal and minor firming for PRB coal. Beyond that, stagnant prices for the other reported coals is consistent with low demand and deferred sales. More significantly, Platts' spot prices for later periods, such as third and fourth quarters of 2005 and calendar year 2006, are flat or declining for CAP, NAP, and ILB coals. This could indicate either a new wait-and-see mood among buyers or buyer recognition that deliveries for 2005 are already predominately committed. Forward prices for PRB and UIB spot coal generally increase in the out quarters and into 2006, which is consistent with firm, continuing interest and dealing for these coals, along with confidence that, over time, those coal commitments can be delivered.
The prices, as well as the derivation methodology, reported by Argus Coal Weekly differ somewhat, but its observations are essentially consistent with the information above. Argus' reports may indicate a late turnabout in certain coal market trends. Demand for high-sulfur coal, from ILB and NAP suppliers, has been strengthening according to both Argus ( Coal Weekly , December 23, pp 2, 3, 5) and Energy Publishing's U.S. Coal Review ( December 27 pp 1, 13, 16). Argus' polling of market participants indicates that demand for ILB coal in 2004 has been higher than mines in the Basin could deliver. Based on past experience and their financial limitations, ILB suppliers were unable or unwilling to ramp up productive capacity in 2004 even as spot prices rose to historic highs. Two or three producers are said to be preparing for new production in 2005, but exact dates and capacities are uncertain or, in one case, delayed by localized flooding problems at the mine. The 2.6 mmst-per-year Zeigler 11 mine in Illinois, which closed in September under bankrupt Horizon Natural Resources, had a significant impact on regional capacity. New owner, International Coal Group (ICG), has not indicated when the mine might reopen, but ICG is likely to look for firm, longer-term contracts including appreciably higher prices than the previous owner. Argus reports that several large customers for ILB coal were shopping for new coal deliveries as early as February 2005, and even more buyers will be soliciting for third and fourth quarter deliveries (Coal Weekly, December 23, p 2).
The NAP coalfield is better positioned to supply new coal production to higher-sulfur combustion units. In that region, more capacity could be opened or reopened more readily as spot and contract prices rose. This would especially benefit established customers in nearby States in the Northeast, where CSX Railroad is the predominant rail carrier. In the past 4 weeks, CSX improved its carloadings of coal by 2.1% over the same period in 2003, which is welcome news after more than a year of service problems (Coal Weekly, December 23, p 9). This fact has apparently encouraged both power producers and other industrial coal customers to reenter the NAP market. According to Energy Publishing's interviews, however, the CSX improvements have taken concerted efforts and the railroad's capacity problems are far from resolved, so there it is likely that added coal deliveries in 2005 could again surpass CSX capacities (U.S. Coal Review, December 27, pp 4, 13).
Coal market trackers during 2004 had to depend on all their contacts and intuition to surmise demand and supply conditions. Because the overtaxed eastern rail carriers were applying triage criteria to determine to which customers to ship coal, consumers tended to downplay the openly stated sizes of their stockpiles (U.S. Coal Review, December 27, p 13). Analysts believe that hoped-for improvements in 2005 in rail equipment and personnel will certainly help, but may not be enough to take coal consumer stockpiles to their targeted levels. On the other hand, with service improvements on CSX lines, buyers now report that some suppliers have not in fact had coal on hand when trains arrived at mines or loadouts. This may support rumors in recent weeks that highly publicized problems that the eastern railroads had keeping up with demand in 2004 were masking the reality that some producers were still not able to produce coal at levels for which they had contracted.
Earlier Input (Updated December 27, 2004)
In late November and early December, activity in both spot and term contracts had been slow. The reasons were arguable. It may be that several weeks of mild weather in the Eastern and some Midwestern service areas of coal-burning power providers had tempered their concerns over fuel. It may be that estimated coal stocks of 40 to 42 days at utilities (Coal Outlook, November 29, pp 11-12), though historically low, did not seem unreasonable when buyers considered the coal prices being offered. It may be buyer comfort, now that coal production had risen. EIA estimates of coal production were up by 3.6 percent for January through November, 2004 versus 2003. For those same periods, production east of the Mississippi is up 3.4 percent, or 14.4 million short tons (mmst) ( EIA Weekly Coal Production).
EIA attended the Coal Trading Conference in New York on December 8
and 9 and found a strong consensus that activity in the spot coal market
was essentially done for the winter of 2004/2005. This conclusion was
based on the reasons noted above as well as the delivery problems described
below.
Coal exports are up in 2004 (National Mining Association, International Coal
Review Monthly, November 2004). Comparing January through September of 2004 and
2003, however, the net increase (adjusted for higher coal imports and accounting
for metallurgical coal preparation losses) is only 3.6 to 4.8 mmst. This means
that most of the estimated 16 mmst increase in Eastern production is still in
the United States.
This lends credence to reports that diminished interest in further coal purchases, especially in the spot market, were related to presumed continuing delays in rail coal deliveries. Coal consuming power plants received about 2/3 on average of expected rail coal deliveries in recent months. And, “U.S. Coal Review” reports (November 29, p. 6) that “TVA (Tennessee Valley Authority) can't buy any spot coal, right now, because it doesn't want to risk getting a permit for a train that would result in the coal being delivered ‘in place of lower cost (contract) coal' . . . That's a consideration for many utilities.” Finally, in view of current high inventories of natural gas in the United States, some power producers “increasingly will rely on underutilized gas-fired generators” in the view of Jeffries & Company analyst Frank Bracken (Coal Outlook, November 29, p 11), and despite evidence of the volatility and weather-sensitivity of natural gas prices. For example, beginning on Monday, December 13, a drop in temperatures in the East pushed up wellhead prices by 18 percent for the week (EIA Natural Gas Weekly Update, December 16).
None of this implies that interest in coal purchases has evaporated. Electric power generators - seeking to rebuild inventories when opportunities present, and some beginning to prepare for a possible hot summer - have been sealing contracts for term coal. Apparently, more of those contracts are multi-year and may have reopeners indexed to future coal market prices and operator cost factors. Speakers at the Coal Trading Conference, December 8 and 9, were in general agreement that new coal contracts will conform to the current price floors in the East, generally in the mid-forty-dollar-range in Appalachia.
Opinions were disparate on the direction spot prices will take when activity heats up again in the Spring. Peter Fusaro, Chairman of Global Change Associates, prognosticated spot coal prices up another 50% in 2005, reaching about triple what they were in 2003. Mr. Fusaro, whose firm deals in energy trading and hedge funds, puts coal in a broad energy markets context. He projects “a sustained bull market in energy for many years” and expects rising consumption, high geopolitical risk, and more price volatility (Coal Outlook, December 13, p 1). Other speakers expect PRB coal to continue new inroads with Eastern consumers and improving rail capacity to get the coal delivered. Stephen Smith of Sempra Energy Trading expects declines in CAP production and continuing transport problems, while cautioning that the dominating influence China may exert on international raw materials and ocean transportation (the “China factor”) is far from settled.
Alistair Stevenson of PIRA Energy Group expects growth in U.S. coal demand in 2005 (after all, 2004 demand was lower due to mild weather) and also expects PRB coal inroads in the East. The inability of CAP and NAP coal producers to increase production enough to meet demand, and the scarcity of new steam coal imports, due largely to limitations of infrastructure in Colombia, ensure that power sector coal inventories will not be rebuilt in 2005. From the railroad perspective, Tom Rappold, Assistant Vice President, Utility and Industrial Coal Marketing with Norfolk Southern Corporation, expects small increases in Appalachian production, continuing high prices, fewer price spikes owing to increased imports. He noted that Norfolk Southern's greatest growth, however, has been in delivering PRB coal transferred from other carriers and that NAP Pittsburgh seam producers foresee no major increases in capacity until 2011.
At its October earnings conference, Consol Energy announced that third quarter operations improved in the second part of the quarter, bringing production closer to company goals than previously expected. Production and earnings were lost due to “adverse geology” at Mine 84 and a longwall move at Bailey mine, but operations have been improving. Consol has been spared most of the recent delivery problems in the East because it ships much of its coal via barge, including its own barge line, and has service options from both major railroads at its larger mines (Coal Outlook, November 8, p 12). Consol is the leading producer of NAP coal and Massey holds that position for CAP coal.
At their earnings conferences, Arch Coal and Peabody Energy announced
their plans to divert some steam coal production to the metallurgical
coal market (Coal Outlook, October 25, p 1). At its October earnings
conference, Consol Energy announced that 3rd quarter operations improved
in the second half of the quarter, bringing production closer to company
goals than previously expected. The lower production and earnings resulted
from “adverse geology” at Mine 84 and a longwall move at Bailey mine,
but operations were improving. Consol has been spared most of the recent
delivery problems in the East because it ships much of its coal via
barge, including its own barge line, and has service options from both
major railroads at its larger mines (Coal Outlook, November 8, p 12).
In NAP, Consol brought some of its extra capacity (“incremental increases”)
back into production, but warned that developing totally new mines will take
6 or 7 years to permit, 10 years to open, and will not happen without term
contract commitments at $60-$70 per short ton (U.S. Coal Review, October 11,
p.5). With the resolution of most of the 2002-2004 coal company bankruptcies,
and sale of their assets, and with shuttered mines coming back on line, Eastern
coal production increased, along with new contract and spot prices. The effects
of those deliveries will be felt mostly in calendar year 2005. In addition,
a ruling on November 23 by Administrative Law Judge Bernard Labuskes, Jr.,
of the Pennsylvania Environmental Hearing Board, extended the closure of Maple
Creek Mining's High Quality mine in Washington County, PA. Judge Labuskes ruled
against the company, which had been forced to stop production on November 13,
on the basis of damage that would occur to a surface stream and spring overlying
planned longwall mining (Platts Coal Trader, December 2, pp 1,4). Although
the ruling may be appealed, the mine has begun missing contract deliveries
to U.S. Steel, Allegheny Power, and Reliant Energy, and there is concern among
mine operators that the ruling will be applied to other Pennsylvania longwall
mines (U.S. Coal Review, November 29, pp 1,13). (Based on discussions validating
other longwall sections with the Pennsylvania Department of Environmental Protection,
Maple Creek resumed mining at midnight on December 3, using continuous mining
machines. This will produce 1/5 of what the longwall produced and eventually
about 1/3, when a third machine arrives, while the longwall system is moved
and as appeals continue (Coal and Energy Price Report, December 6, pp 1,4).)
In lieu of Appalachian coal, the somewhat lower-Btu, higher-sulfur ILB coals sold to customers with sulfur dioxide emission allowances or flue gas scrubbers at record high average spot prices for prompt-quarter delivery (see graph above, footnote 1). New emissions scrubbers being installed this year and next would increase demand for the kind of coal abundant in the ILB.
Several factors besides increased demand may push up prices, including
price adjustments by mine operators due to increased costs for fuel,
steel, and even explosives, and increasing barge rates to get the coal
to buyers (Coal Outlook, November 8, pp 1, 15). Because of high demand
(not just from coal) and a limited barge fleet, some barge rates are
said to have doubled in recent months.
PRB coals have sold during 2004 at relatively stable prices. PRB producers
and energy and financial analysts expect the coal to make new, permanent inroads
with traditional eastern coal customers. Producers set higher production targets
for 2005 and this year than in 2003. In the face of rising prices in other
supply regions, one explanation of stable PRB prices this year is the time
and investment required of most eastern coal customers to switch to PRB coal.
Another explanation is uncertainty that the rail transportation system, already committed to multi-track, "24/7" unit trains traversing the PRB all year long, can continue to increase annual coal deliveries. Some buyers currently have sufficient coal under contract but, since it has been delayed repeatedly or not yet delivered, they are deferring new purchases. They see no benefit in dealing for additional coal until they know when they will get coal already on the books (U.S. Coal Review, November 8, p 7). New rail capacity serving the PRB is passing procedural challenges and is becoming closer to reality, but neither the Tongue River Railroad into the Montana PRB nor the Dakota, Minnesota, and Eastern (DM&E) Railroad spur into the Wyoming southern PRB would be completed before 2006, and more likely 2008 for the DM&E. Some PRB producers have been unable to respond to solicitations for coal by new potential customers in the East because the Union Pacific rail system has been congested and it has refused to ship test burn deliveries (Coal Outlook, November 8, p 9). Whatever has held PRB spot prices level in 2004, the spot prices for calendar year 2005 are currently $0.55 to $1.25 higher ($6.30 to $7.00 per short ton). A recent solicitation for 8,800 Btu PRB coal received several offers for 2005 delivery ranging from $7.90 to $8.58 per ton, F.O.B. rail, as part of 3-year contracts, with prices escalating to prices from $8.40 to $9.36 per ton by 2007 (Coal Outlook, December 13, pp 2-3).
High spot coal prices led to term contract prices above $40 per short
ton in the East, with lower price ceilings in the ILB and the UIB.
Buyers in need of stoker coal, such as small municipal utilities, commercial
and institutional, and small industrial consumers, have to pay considerably
more. For example, the following prices are f.o.b. mine or railhead:
$49 per short ton for 12,500 Btu Ohio stoker coal to Peru (IN) Utilities;
$45.50 per short ton for CAP stoker coal to University of Virginia;
and $85 to $86 per short ton, from an Eastern broker for industrial
stoker coal (Coal Outlook, November 15, pp 4,1,15). Deals were both
spot and term but the distinction was somewhat muddled because buyers
looking for contract coal often settled for a short-term, spot purchase
just to get some coal into play.
Market analysts expect international metallurgical coal prices to remain high
for the rest of 2004 and well into 2005. Two producers of premium U.S. met
coal recently confirmed that their orders are again increasing and that buyers
are bidding prices higher. Officials from both Drummond Coal Sales and PinnOak
Resources noted that much of their 2005 production is becoming committed. Walter
Schrage, Executive Vice President for Sales and Marketing, noted in reference
to PinnOak's low-volatility product, “I'd say it wouldn't be lower than ($125
per short ton)” in 2005 (Coal Outlook, November 1, p 15). Jim Walter Resources
in Alabama has announced major investments in its Blue Creek Number 7 mine
to increase met coal production by 2.7 mmst by mid-2008 (Argus Coal Daily,
December 16, p 1) and Quest Minerals and Mining is reopening its high-quality
metallurgical sections at its Slater's Branch mine in eastern Kentucky, projecting
20,000 ton per month production by July 2005 (Coal Trader, December 17, p 1).
International met coal price speculation may subside some now that Grand Cache and Western Canadian Coal Corporation announced contracts in South Korea, China, and Japan for 1.3 mmst of hard coking coal in 2005, priced at $125 Canadian per metric tonne (Coal Trader, December 17, p 1). Expectations for 2005 have been mixed because of the many unknowns, including: the impact of announced low coal and met coke exports from China; possible continuation of longwall difficulties in Australian met coal mines; broad and severe coal shortages that may, it is feared, reach “crisis” proportions in India, mostly for steam coal; uncertainty as to how much new met coal from U.S. production and new Canadian mines will be available; and the potential for escalation of U.S. exports because of the lowest U.S.$ exchange rate in 9 years. Earlier, at the annual met coal negotiations with Japanese steelmakers, Australian and Canadian suppliers were expected to receive $115 to $120 per metric tonne, F.O.B. dock, for 2005 deliveries, despite producer targets around $130 (Coal & Energy Price Report, December 2, p 3). At the ICCC Forum in Budapest in the second week in December, U.S. met coal producers and western European and South American steel mills reportedly negotiated “major” tonnage deals for prices exceeding $130 per tonne for fiscal year 2005 (U.S. Coal Review, December 13, p 2).
Coal Production (updated December 20)
The U.S. Monthly Coal Production (graph below) includes
production based on 2004 Quarters 1 through 3 mine surveys by the Mine
Safety and Health Administration (MSHA) and on 2003 final MSHA survey
data. EIA estimates 2004 coal production of 1,111.4 million short tons
(mmst), based on January through December production allocations. That
is 39.7 mmst, or 3.7 percent, more than in 2003. Of the net increase,
22.6 mmst are attributable to production west of the Mississippi River.
Annual 2004 production East of the Mississippi is 17.1 mmst ahead of
that in 2003.
The latest monthly production comparisons (see below), for December 2004 versus
December 2003, shows 3.9 mmst more tons, which equates to 4.3 percent more production
than in December 2003. The latest estimated weekly coal production (for January
8, 2005, versus January 8, 2004, year to date) is 22.7 mmst, versus 24.0 mmst
in 2004. The comparison is noted for the record, but is not meaningful because
of the short time period and the differing effects of holidays and weather problems,
period to period.
Note: This graph is based on final MSHA coal production survey data for quarters 1 through 4 of 2003, MSHA-based revisions for quarters 1 through 3 of 2004, and preliminary EIA production estimates through December 2004 . |
Coal production continues to be affected by a persistent scarcity of miners, especially in the East where most of the labor-intensive underground mines are located. The problem results largely from economic conditions during the 1990s, when coal prices were in an extended slow decline, miner wages were relatively stagnant, and vibrant growth in other parts of the economy offered better wages and/or working conditions than working underground. That, combined with a continuing loss of employment in coal mining since 1980, gave many young workers with technical skills, mobility, and/or ambition the extra incentive to leave the coalfields.
Today, the industry is composed primarily of two groups—miners at or nearing retirement and young newly hired apprentices, still in training and with little mining experience. Massey Energy Company, the largest bituminous producer in the region, recently reiterated that “The shortage of labor in Central Appalachia continues to be the most difficult business issue we face” (Coal Outlook, November 15, pp 1, 14). Miners with engineering or technical training are critical for today's computerized, automated mining systems, but people with those qualifications tend not to prefer mining. Although mining companies are proactively recruiting new workers, they also have to provide concentrated courses of training to make up for extended apprenticeships that new miners used to serve at the side of the earlier generation of journeymen miners. There has even been talk, so far not acted upon, of recruiting experienced miners from Mexico (U.S. Coal Review, November 8, pp 1, 13).
Transportation (updated
December 17)
At the Coal Trading Conference of December 8 and 9, the performance of the railroads was an important topic. Although many coal producers have been critical of the railroads' performance, several analysts at the conference felt that there were mitigating circumstances. For one thing, power producers are asking more of the railroads in recent years by carrying smaller coal inventories. This was not a problem as long as they were letting stockpiles dwindle, as was the case in much of 2003 and 2004, and receiving less coal than they were consuming. When national and international coal supplies became tight, however, in 2004, that condition coincided with a wide resurgence in U.S. demand for raw materials, manufactured goods, and retail products – largely shipped by rail – at the same time that demand in the coal-fired generation sector heated up.
Further stressing railroad capabilities were unexpected changes in coal distribution patterns. Coal producers responded to the international scramble for metallurgical coal by converting former domestic steam coal production to met coal, largely sold as exports. An additional 4.3 mmst of overseas exports left via U.S. coal ports (the Norfolk area and Baltimore primarily) from January through September. The additional export coal was unplanned for and required reassignments of locomotives and coal cars, and additional crews for the added east-west traffic, rather than the accustomed shorter, more north-south routings. Further, as power producers and industrial consumers found traditional coal suppliers overextended, they turned to alternative domestic and even overseas sources, generating still more traffic along corridors where enough trained rail crews were oftentimes not in place.
As Pat Panzarino, director of Coal Supply for Xcel Energy observed, the railroads have been asked in 2004 to deal with old, inefficient loading practices and equipment at some mines and rail loadouts. Panzarino suggests, as he is doing at Xcel, that power generators make their plants “hospitable” for coal carriers by measures such as modernizing unloading facilities, thereby speeding up train unloading time. This will cost the power plants, of course, but he believes the plant operators will be able to win better rail rates and, more importantly, will receive better service because carriers tend to allocate service based on profitability (Coal & Energy Price Report, December 13, pp 1, 4). Power plants need better service, according to Tom Rappold of Norfolk Southern, and it will take closer coordination by all players – railroads, mine operators, and coal customers – to achieve it. Right now, among southern tier power producers in Norfolk Southern's service area, he reckons coal inventories stand at 15- to 20-day levels, much below the 25- to 30-day levels he thinks they would prefer. And, he noted, “it will be difficult, obviously, getting those (stockpiles) to whatever level the utilities would be comfortable with.” With better forward planning and coordination, Rappold called for evening out of coal flows throughout the year “so we don't have these spikes” (Coal & Energy Price Report, December 13, p 4).
Of course, there are railroad operational issues involved as well,
many of which resulted from the repeated railroad consolidations during
the late 1980s and the 1990s. Some of the coal-hauling capacity that
was abandoned or sold off during years of consolidations may now be
needed. The elimination of little-traveled rail lines in areas that
no longer supported appreciable rail business had no significant effect
on capacity, but cuts in alternative routes, rolling stock, locomotives,
and experienced personnel were effectively designed to eliminate capacity,
viewed at the time as excess. Customers at both ends of rail supply
chains increasingly complain that the capacity of the rail system in
North America overall is constrained. “For the first time since the
[North American] network was built out to its maximum about 80 years
ago, we will have to invest very large amounts in network capacity,
not to mention the associated locomotives and cars,” according to Canadian
Pacific Chief Executive Rob Ritchie (Argus Coal Weekly, November 5,
p 2). Part of the difficulty also stems from measures the railroads
applied in 2001, when their loadings and revenues shrank with the economic
slowdown. Workforces were reduced, in some cases through early retirement
offers.
During the 4 weeks ended December 4, U.S. coal-hauling railroads transported
5 percent more coal than a year earlier. Average train speeds increased in
the East, while losing time in the West, compared with the preceding four weeks.
Average coal carloads per week reported by the Association of American Railroads
were 132,852 for the 4-week period, up 5% over the same period last year (Argus
Coal Weekly, December 10, p 9). In the East, average Norfolk Southern coal
carloadings were 15.6 percent above the same period in 2003 and average carloadings
on CSX were up by 2.6 percent. Burlington Northern Santa Fe – the largest U.S.
railroad - had coal carloadings up a healthy 10.7 percent over the same period
a year ago. Only Union Pacific lost ground, loading 6.2 percent less coal than
a year earlier as a result of system congestion and two derailments on coal-hauling
routes.
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Contact(s):
Rich Bonskowski
Phone: 202-287-1725
Fax: 202-287-1934
e-mail: Richard BonskowskiBill Watson
Phone: 202-287-1971
Fax: 202-287-1934
e-mail: William Watson