Introduction
A year ago at the time of this conference,* domestic coal prices were well into a rapid climb that did not level off until mid-summer. The run-up in coal prices was unlike anything that had been seen since the 1973 Arab oil embargo, when coal prices shot up and then continued to rise until 1982.1 The major difference between that perturbation in coal prices and the current one that began in late 2000 is that the aftereffects will not be long-lasting this time.
Coal Prices, Supplies, and Demand
Several significant coal supply factors have changed since 1973. One fact that is often overlooked is that prior to 1973, U.S. coal consumption was already growing at a healthy rate—8.5 percent over the previous 10 years—compared with 4.4 percent over the decade ending in 1999. In the 2 years following the oil embargo, however, major changes in U.S. Government policy strongly promoted the use of more coal and led to nearly 2 decades of research into alternative fuel technologies using coal. Perceptions were widespread that coal could eventually dominate both electricity generation and industrial consumption, as well as make inroads into vehicular consumption (as liquid synfuels) and possibly into natural gas heating and hydrocarbon feedstock applications (as synfuel gas).
The result was that coal suppliers assumed demand would increase above the already strong rate of increase. They rapidly acquired new coal reserves and expanded their productive capacity, even as many companies new to coal mining acquired coal properties and also joined the market. The difference this time is that by mid-year 2000, excessive levels of productive capacity had been mostly eliminated over 25 years of declining real coal prices, low company profits, bankruptcies, buyouts, and acquisitions. The coal industry of 2000 was not about to be fooled again. There has been no rush to increase mining capacity. In fact, the fewer, larger players in the industry are today more market-savvy and are willing to manage their assets. They will not hesitate to idle or shut down a less profitable mine and to withdraw production from the coal supply pool rather than sell coal at rates of return that may be lower than inflation.
The other major change is that coal is now perceived as being potentially subject to price volatility. This volatility results from the deregulation of commodities closely linked to coal—natural gas, railroads, and the ongoing deregulation of electricity providers. As a result, energy marketers now include coal in their over-the-counter and futures markets. Coal prices, however, have not undergone the extreme volatility that natural gas and electricity contracts have, as in the California electricity price problems of 2000-2001. For example, Figure 1 illustrates both the quiescent coal prices during most of 2000 and the doubling of some of those prices over 5 to 10 months.
Coal Prices, Supplies, and Demand (Continued)
* This paper is scheduled for presentation at the Iron and Steel Society annual conference, March 10-13, 2002, in Nashville, TN.
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