Coal Prices and Earnings (updated November 29, 2004)

For the business week ended November 26, most average spot coal prices tracked by the Energy Information Administration (EIA) did not change (see graph below). Spot prices remain high amidst slow sales and slow deliveries. In the East, average prices hover at record highs for Central Appalachia (CAP) and the Illinois Basin (ILB), and near record high for Northern Appalachia (NAP).

The average spot price for CAP compliance coal remains fixed at the previous five weeks' record high: an average $66.50 per short ton for the Big Sandy/Kanawha commodity indexed by EIA. Spot prices for the ILB coal in this report, with good proximity to major Midwestern markets, held at the record-high of $35.25 per short ton, and for the NAP coal tracked by EIA the price remained at its recent plateau of $58.25. Only the average spot price for the Powder River Basin (PRB) higher-Btu coal changed, falling to $5.85 per short ton, expanding a downward from the $6.70 reached briefly in the week ended October 1. The 11,700-Btu Uinta Basin (UIB) coal maintained $29.00 per short ton for prompt-quarter spot sales, where terrain limits track expansion and the capacity for increased shipments.

With coal stockpiles low in all consuming sectors, occasional jumps in Eastern coal spot prices are not unlikely. Prices venturing above $60.00 for NAP spot sales, for example, possible following the September price surge to $63.00 for the13,000 Btu/pound, less-than-3-percent-sulfur Pittsburgh seam coal. It remains unclear whether CAP spot prices can go higher at this time, because of low availability. To a great extent, the stability in all the spot prices listed above reflects the current unavailability of coal in the market—when no sales are transacted, or too few to be meaningful, the analysts at Platts who survey coal suppliers and buyers for spot coal sales leave the latest valid prices intact. Ironically, word of newly available coal supplies could result again in a jump in spot prices, or it might result in activity in longer-term contract sales.

In addition to prices and coal supplies, operating problems within the supply chain from most coalfields have restrained deliveries and compelled some coal buyers to defer new spot purchases (See Transportation section below). Relatively mild weather in late October and in November in the East and Midwest, along with recent EIA statistics showing near record natural gas storage levels and declines in natural gas and oil prices, have slowed activity in spot coal markets. In fact, analyst Frank Bracken, of Jefferies & Co., recently postulated “that (consumer) coal inventories are being depleted more quickly than they can be replenished, which means some electric utilities will increasingly rely on underutilized gas-fired generators” (Coal Outlook, November 22, pp 7-8). As a result, he surmised that 2005 natural gas prices may be higher than his firm previously estimated.

Massey had previously reported that projected 2005 coal production is already nearly all committed (Coal Outlook, September 13, p 10). 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, 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.

Interest has grown in alternative coal sources, such as the somewhat lower-Btu, higher-sulfur ILB coals. ILB coals are selling 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). Several factors, besides increased demand, that may push up prices in the near future include 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. Finally, new emissions scrubbers being installed this year and next would increase demand for the kind of coal abundant in the ILB.

In NAP, Consol has brought some of its extra capacity (“incremental increases”) back into production, but warns 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 is increasing, along with new contract and spot prices. The effects of those deliveries will be felt mostly in calendar year 2005. To a limited extent, coal customers near the Atlantic and Gulf coasts have renewed or added contracts for imported coal from Colombia or Venezuela to their supply chain.

Previously identified factors that contributed to 2004 high coal prices include: seasonal cold weather in some areas beginning to increase coal consumption, following earlier predictions for a "strong winter burn" at electric power plants; general low availability of low-sulfur bituminous coal; a consequent increase in purchasing of higher-sulfur coals (Argus Coal Weekly, September 10, pp 5-6); and strong, growing international price competition for metallurgical coal (Coal Outlook, September 20. pp 1, 15). At recent 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).

Analyst David LaBonte of Citigroup/Smith Barney lowered expected earnings for Massey Energy, noting that coal sales were 0.9 mmst below management expectations for the past 3 months and may be another 1.0 mmst lower than targeted for the 4th quarter. The reduced earnings were related to a host of issues, including diesel fuel costs, steel costs, increased labor costs (including recruiting and training) following labor shortages, curtailed shipments due to chronic railroad capacity problems, and delays due to hurricanes during the period (Coal Outlook, November 8, p. 10). Massey previously reported that projected 2005 coal production was nearly all committed (Coal Outlook, September 13, p 10).

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). Consol is the leading producer of NAP coal and Massey holds that position for CAP coal.

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. 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 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 Railroad spur into the Wyoming southern PRB would be completed before 2006. In recent months, 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).

High spot coal prices have 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 are both spot and term but the distinction is somewhat muddled because buyers looking for contract coal often end up settling for a short-term, spot purchase just to get some coal into play.

Earlier this past summer, eastern bituminous producers converted or resold much of their production into the more lucrative metallurgical coal export market. In recent months, as higher contract prices have been negotiated for steam coal, some of the lower-grade met coal was lured back to more traditional steam coal contracts. Market analysts expect international met 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). Two Asian steel producers predicted that U.S. met coal will be purchased in 2005 for $106 to $110 per (metric) tonne, or about $96 to $100 per short ton (Coal Outlook, November 8, p 7). Expectations for 2005 are mixed because of the many unknowns, including: the impact of announced low coal and met coke exports from China; possible continuation of longwall difficulties in Australian met coal mines; broad and severe coal shortages that may, it is feared, reach “crisis” proportions in India, mostly for steam coal; uncertainty as to how much new met coal from U.S. production and new Canadian mines will be available; and the potential for escalation of U.S. exports because of the lowest U.S.$ exchange rate in 9 years.

Coal Production (updated November 23)

This update incorporates minor revisions to the 2003 production statistics (red graph line), based on Mine Safety and Health Administration (MSHA) final 2003 data. EIA estimates year-to-date 2004 coal production of 941.7 million short tons (mmst), through the week ended November 6, 2004. That is roughly 26.6 mmst, or 3.0 percent, ahead of the same period last year. Of the net increase, 16.4 mmst are attributable to production west of the Mississippi River. East of the Mississippi, after lagging 2003 production through May, mine output rose in response to increased demand. Year-to-date production East of the Mississippi is now 13.2 mmst ahead of the same period in 2003.

The latest monthly production comparisons (see below), for October 2004 versus October 2003, shows 0.8 mmst fewer, which equates to 0.9 percent less production than the unusually high output in October 2003. Estimated coal production for the first 10 months of 2004 totaled 921.9 mmst, which is 26.6 mmst, or 3.0 percent, ahead of the revised production for the first 10 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.

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 November 23)

Railroads are facing the reality that perhaps some of their 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).

During the 4 weeks ended November 13, U.S. coal-hauling railroads transported continued hauling more coal than a year earlier. Although the average time to get the coal delivered is still slow, average train speeds increased in the East, while losing time in the West, compared with the preceding four weeks. Total coal carloads per week reported by the Association of American Railroads averaged 134,822, up 1.8% over the same period last year, but down from 136,000 in the previous 4 weeks (Argus Coal Weekly, November 19, p 9). The slowdown in average speed corresponds with a time of period of record or near-record high volumes for U.S. railroad traffic for freight of all types. For example, total rail freight totaled 33.1 billion ton-miles for the week ended October 16, 2.2 percent above the same period in 2003 (Argus Coal Weekly, October 22, p 9).

Of the four major coal-hauling railroads, Union Pacific, Norfolk Southern, and CSX all reported slower average velocities for system coal hauls during the 4 weeks ended October 16, compared with the previous 4-week period. The other major carrier, Burlington Northern-Santa Fe, maintained the same average velocity as in the prior period. Changes in velocity, or average train speed, indicate whether railroads are improving their capability to meet expected delivery schedules.

Domestic customers claim that Norfolk Southern and, especially, CSX give preferential treatment to the rejuvenated coal export market, favoring higher-profit rail hauls to Hampton Roads and Norfolk over hauls to power producers or industrial consumers and aggravating their low inventory problems. An insight into possible profitability of met coal hauls came from the interview of Walter Schrage of PinnOak Resources noted earlier. Mr. Schrage reported notification of an April 1, 2005, net rail rate increase of $5.10 per short ton, which may climb to $6.37 after a pending fuel cost adjustment, to transport their southeastern West Virginia coal to Norfolk for export (Coal Outlook, November 1, p 16).

Part of the difficulty 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. 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 increasing demand is also a 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