Coal Prices and Earnings (updated December 27, 2004)

There was no sampling of coal spot prices for the business week ended December 24 and no new average prices generated for the coal spot price graph below. For the previous business week, ended December 17, the average spot coal prices tracked by the Energy Information Administration (EIA) changed just slightly in two of the five major coal supply regions (see graph below). Spot prices remain nominally high although sales are virtually nil for prompt quarter deliveries before April 2005. In the East, average reported prices match record highs for Central Appalachia (CAP) and the Illinois Basin (ILB), and are near the record high for Northern Appalachia (NAP).

Spot prices for the ILB coal in this report held at the record-high of $35.25 per short ton. The average spot price for CAP compliance coal returned to its record high of $66.50 per short ton for the Big Sandy/Kanawha commodity indexed by EIA, after a $0.35 dip the prior week. And for the NAP coal that EIA tracks, the price remained at its recent plateau of $58.25. The average spot price for the Powder River Basin (PRB) higher-Btu coal remained at the $5.75 per short ton reached in the week ended December 10, extending the downtrend from its brief $6.70 peak in the week ended October 1. The 11,700-Btu Uinta Basin (UIB) coal has maintained $29.00 per short ton since the week ended October 1 for prompt-quarter spot sales, where terrain-limited trackage and delays at the Denver interchange impede capacity for increased shipments.

Though Platts Coal Outlook did not survey coal buyers and sellers in the week ended December 24, reports from other sources 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 Argus Coal Weekly (December 23) and Energy Publishing's U.S. Coal Review (December 27). 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 are now 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 news reporters this year have had to depend on all their contacts and intuition to surmise demand and supply conditions. Because the overtaxed eastern rail carriers have been applying triage criteria to determine to which customers to ship coal, consumers have tended to downplay the openly stated sizes of their stockpiles (U.S. Coal Review, December 27, p 13). Coal 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 the levels they would prefer. On the other hand, with service improvements on CSX lines, buyers now report that some of their suppliers have not in fact had coal on hand when trains arrived at the mines. This may support rumors in recent weeks that highly publicized problems that the eastern railroads had in 2004 keeping up with demand were masking the fact that some producers were not yet 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, have been related to 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 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 year-to-date 2004 coal production of 1,027.4 million short tons (mmst), through the week ended December 4, 2004. That is roughly 33.5 mmst, or 3.4 percent, ahead of the same period last year. Of the net increase, 17.0 mmst are attributable to production west of the Mississippi River. Year-to-date production East of the Mississippi is 16.5 mmst ahead of the same period in 2003.

The latest monthly production comparisons (see below), for November 2004 versus November 2003, shows 8.7 mmst more tons, which equates to 9.7 percent more production than in November 2003. Estimated coal production for the first 11months of 2004 totaled 1,014.9 mmst, which is 35.3 mmst, or 3.6 percent, ahead of the production for the first 11 months of 2003.

Note: 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 November 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.

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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Rich Bonskowski
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e-mail: Richard Bonskowski

Bill Watson
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e-mail: William Watson