(Today's updates are limited to the spot coal prices in the graph below,
and to the Metallurgical Coal Prices graph in the Market Developments section)

Coal Prices and Earnings (updated June 13, 2005)

For the trading week ended June 3, there was a major decline in the average spot price for the Central Appalachia (CAP) coal indexed by EIA, which moved from $64.50 to $60.00 per short ton. There was also movement in spot coal prices in the Powder River Basin (PRB). The average spot price for the 8,800-Btu coal indexed by the EIA rose by $0.17, to $8.61 per short ton, for prompt quarter delivery (see graph below). Prices for the same coal type show every indication of further increases, with spot prices for 4Q2005 and 1Q2006 delivery averaging $8.88 and $9.26 respectively. There were no changes in the other three regional coal commodities indexed by EIA. The Illinois Basin (ILB) spot price for 11,800-Btu coal held at $36.00 per short ton. The average price for Northern Appalachia (NAP) remained at $56.00, the average spot price for the Central Appalachia (CAP) coal indexed by EIA continued to sell for $64.50 per short ton, and in the West, the Uinta Basin (UIB) average spot price was again unchanged, sticking at $29.00 per short ton (its price ever since the week ended October 1, 2004).

Average Weekly Coal Commodity Spot Prices Business Week Ended June 10, 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.

As of June 3, PRB coal shipments are improving but still recovering from the two coal train derailments on the southern PRB joint line during the weekend of May 14-15. Industry experts do not agree on how soon and how completely coal shipments from the PRB can recover. Morgan Stanley analyst, James Valentine, estimated that shipments were 10 to 15 percent lower than normal two weeks following the mishap (Dow Jones Newswires, by Spencer Jakab, June 3). A Union Pacific (UP) spokesman was uncertain whether the shortfall could be made up, whereas a Burlington Northern Santa Fe (BNSF) spokesman felt that missed deliveries would eventually be made. Several experts noted that very much depends now on the weather. If prolonged summer heat sets in soon in major coal-burning electric service areas, the low inventories at consumer plants could persist all summer. If not, the shortfall could be made up “within 30-45 days,” said Ramesh Malhotra, president of the Coal Network brokerage. Morgan Stanley estimates for the first week after the derailments, the week ended May 21, were slowdowns of 17 percent and 38 percent, respectively, for Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) railroads (Coal Outlook, May 30, p 13). Information was somewhat contradictory, however. The BNSF website reported only a 10.6 percent decline for the week ended May 22, compared with the previous week, and based on average daily trains loaded. Minor differences could result because BNSF statistical weeks end on Sundays whereas Association of American Railroads (AAR) statistical weeks, which EIA also uses in Weekly Coal Production estimates, start on Sundays and end on Saturdays. The AAR data for the week ended May 21, showed that nationwide coal carloadings were down 9.8 percent from the preceding week, and were 13.6 percent lower than the comparable week in 2004.

The joint line normally carries the vast majority of the Wyoming PRB coal shipments to the east and south, as well as to closer power plants in Wyoming and neighboring western States. In the short term, both railroads declared force majeure, beginning with the derailments and to continue until normal operations are restored. Coal deliveries to coal-fired power plants were delayed but not cancelled. Conditions were such by May 30 that the 10 mph speed restrictions in weakened roadbed areas could be lifted, but restrictions to 25 mph and 40 mph were still in effect in some areas. Some of the improvement in coal shipments was gained, however, by sidelining empty trains that had been returning to the Basin: “On May 18 a decision was made jointly with the UP to restrict empty coal trains onto the joint line in favor of moving loaded trains off the lines (BNSF Railway, Service Advisory, May 20). The eventual working out of the derailments and their aftermaths will include reintroducing return trips, to get empty coal cars back to the mines. Kennecott Energy spokesman Dale Scholes estimated that shipments were “at 89 percent” on May 23, and he said that Kennecott was not receiving enough empty cars to load and ship all production.

The PRB slowdown occurs as most power plant coal stockpiles are at or near historic lows. EIA’s latest estimates of fuel inventories at electric power plants show end-of-March coal stocks at 105.0 mmst, an increase over the prior two months, but 7.3 per cent lower than March 2004 levels. At the same time, coal consumption in the electric power sector is estimated to be 2.7 mmst, or 1.1 percent, ahead of January through March of 2004 (EIA Monthly Flash Estimates of Electric Power Data).

First quarter earnings reports from publicly traded coal companies include past, most recent, and projected coal sales and prices. Selected information relevant to current and future markets is included in the table below.

In the reports cited above and in others, most coal producers described strong revenues in 1Q2005, as a result of high pricing for coal sales. Individual issues affected some companies’ latest statistics; for example, nearly half the Consol drop in sales was due to the Buchanan mine closure (see Market Developments section). Foundation Coal Holdings’ relatively modest price projections reflect price and timing factors – the fact that Foundation’s remaining 2005 PRB coal and 95 percent of its 2006 PRB coal sales are already contracted at discounted prices relative to 2004 PRB prices. Nearly all company financial reports cite increased mining costs related to their current and projected mining. The valuations of coal mining properties have also risen sharply. The major companies in general project improved coal supply levels in 2006 and 2007 along with steady but moderating growth in prices, commensurate with projected increases in cost of acquiring properties and operating new mines.

Rising PRB prices in recent weeks coincide with improved rail coal capacity – notwithstanding the May derailment events – (along with higher transportation costs) in the West and with the reassurance coal consumers find in greater percentages of PRB coal being handled under term contracts. Costs of delivering the coal may in part dictate PRB prices at the mine. Rail transportation rates generate one-half to two-thirds of delivered costs for many coal customers and the rates are increasing faster than coal prices (see related news in Transportation section). The greater portion of cost increases for PRB coal at power plants is in railroad costs. Some operators have claimed doubling of rates; increases of “20 to 25 percent,” on average, are said to be common. In addition, coal buyers are paying fuel cost adjustments on all new contracts and much stricter limits on unloading time before demurrage charges kick in (U.S. Coal Review, April 4, pp 7, 21).

Market Developments (Updated June 10, 2005)

Consol Energy has submitted applications and is planning to expand production at the Enlow Fork mine by 70 percent. The mine produced 10.2 mmst of coal in 2004 and, besides underground expansion, the project will include a new preparation plant to handle the increased production. Work is slated to begin in mid 2006, with first production from the new works expected in 2010 (Platts Coal Trader, May 31, pp 1, 4).

Peabody Energy plans to open its third very low sulfur coal mine in the PRB. The new mine will combine reserves from School Creek with a 327 mmst reserve acquired in February on the West Roundup lease, for a total reserve of 800 mmst. The operation is “several years away” from production but has begun the permitting process. The nominal quality of the coal produced will be 8,800 Btu/lb. and 0.5 lbs of SO₂ per MmBtu. According to a Peabody official, “With the high price of emissions allowances, this 0.5 pound product is garnering a significant premium in the marketplace…The value differential between it and a 0.8 pound product is greater than $2.00” (Energy Publishing, Coal & Energy Price Report, Bulletin, April 19).

Turning from Peabody to the other end of the company-size spectrum, a promising development has been noted for small coal producers that control attractive reserve blocks. Prospect Energy, an energy finance company invested primarily in petroleum and natural gas interests, is bankrolling some small, bankrupt coal producers in eastern Kentucky and Virginia. Jim Flores, an officer at Prospect Energy, believes that “the coal industry is undercapitalized” for small producers, and his company plans to focus on underfunded Appalachian and western coal properties (Coal Outlook, April 25, pp 1, 15).

The Kentucky operation, a family-owned, low-sulfur surface mine, is being provided with $4.9 million of senior secured debt and preferred equity financing. The Virginia property, which owns metallurgical coal resources, received $10 million in debt financing, $4 million from Prospect and the rest from a Texas investment partner, Unity Platform. Both coal properties bring undeveloped reserves and mining experience to the deal and will gain access to additional reserves and coal production infrastructure through the financing partnerships.

Coal exports for 2004 were up by 5.0 mmst over 2003, most of which was bituminous coal from the eastern U.S. (EIA, Quarterly Coal Report, Table 1, March 22). Considering that EIA’s estimate of 2004 production east of the Mississippi increased by 15.1 mmst according to revised estimates in March, two-thirds of that increase was sold in the United States. The increase in 2004 exports included 0.2 mmst of added steam coal exports (from both East and West) and eastern metallurgical coal export increases of nearly 4.8 mmst above 2003 levels. That 4.8 mmst increase in met coal exports left primarily via Hampton Roads and Baltimore and put severe strains on the rail distribution of domestic coal, partly because of the extra trainloads but largely because the railroads had not been prepared for the change in shipping patterns. The demand for met coal exports is still greater in 2005 but this year there has been more advance notification.

Major met coal producers recently issued projections of price realizations for 2005 and beyond; they show increases each year, but do not portend prices quite as high as certain $70+ per short ton contracts and $120 per short ton forced spot purchases reported in 2004. For example, Massey Energy, the largest U.S. producer of met coal, expects 2005 realized prices to average $56.86 per ton. This incorporates front loading of $56.68 average prices for met coal spot sales in 1Q2005, compared with $41.17 in 1Q2004. Massey noted that the stronger than expected prices for 1Q2005 result in part from some customers “averaging up” their purchases – paying more in 1Q2005 in exchange for lower-priced contracts in 2006 and 2007 (Conference call reported by Legg Mason, Inc., Baltimore, MD, May 2). For 2006, Massey expects to realize $51 to $52 per short ton overall. That range includes coal already priced at nearly $46 per short ton and implies prices averaging as high as $69 per short ton for about 13 mmst as yet unpriced. Massey expects to produce 14 to 15 mmst of met coal in 2006, of which only 6.5 mmst have been priced (U.S. Coal Review, May 2, p 13).

To assist in evaluating spot and contract prices for metallurgical coal reported in this section, we have added selected met coal statistics from EIA files. The graph below, and its downloadable data file, shows quarterly average values based on coal cost data EIA collects from coke plants. It also depicts monthly averages of values declared for met coal brought to ocean terminals for export or passing U.S. Customs via rail to Canada or Mexico. 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 urgent spot shipments, variances are less extreme than the volatilities often observed in spot price reports.

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

Coal Production (updated May 6, 2005)

The U.S. Monthly Coal Production (graph below) includes production based on mine surveys of 2004 Quarters 1 through 4 by the Mine Safety and Health Administration (MSHA). 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 finished 17.1 mmst ahead of that in 2003.

The latest monthly production, for April 2005, was 91.6 mmst (see below). That is 0.4 mmst fewer tons, or 0.4 percent lower, than in April 2004. EIA estimates that year-to-date 2005 coal production (through April 30, 2005, versus April 30, 2004) is 368.4 mmst, versus 367.3 mmst in 2004. The 1.1 mmst higher production so far this year, represents impressive gains since February, when year-to-date production was 2.8 mmst less than for January through February 2004. The net difference through the end of April results from 6.4 mmst more production west of the Mississippi while 5.3 mmst less coal was produced east of the Mississippi.

Note: This graph is based on MSHA-based revisions for quarters 1 through 4 of 2004 and preliminary EIA production estimates for January through April 2005.

Transportation (updated May 11, 2005)

According to EIA coal distribution data, 65 percent of U.S. coal shipped to domestic customers in 2002 used rail for the entire trip and another 11 percent used rail for part of the trip. Consequently, changes in rail rates for coal hold great significance for domestic energy costs. A number of current legal cases illustrate the importance coal shippers attach to this issue.

In the latest legal action, two of the four major U.S. railroads are battling allegations of unlawful shipping rates. On May 3, the Western Coal Traffic League (WCTL), which represents electric power companies that use rail delivery for coal, filed suit in U.S. District Court in Dallas, asking that the current published tariff rates of Burlington Northern Santa Fe Railway (BNSF) and Union Pacific (UP) be abolished and that any overcharges paid by shippers be refunded (SNL Energy Coal Report, May 9, pp 1, 23). The WCTL contends that each railroad reciprocally concedes certain coal-hauling business to the other. Both railroads currently post “common carrier” rates on the Internet. The WCTL claims that one of the two railroads’ set of rates in certain areas is routinely so high as to be untenable to coal shippers, effectively ceding those areas to its competitor. When existing coal transport contracts expire, the other railroad can then increase its confidential contracted rates in a competition-free marketplace. Spokesmen for BNSF and UP declined to comment, adding that their legal departments were studying the lawsuit.

Previously, BNSF and UP reported in financial statements that in February the Antitrust Division of the Justice Department demanded “information concerning the company’s pricing activities relating to the shipment of coal from the southern Powder River Basin” (SNL Energy Coal Report, May 9, p 1). The Justice Department is reportedly investigating whether the railroads’ postings of rates on the Internet violates antitrust rules.

On April 26, the Surface Transportation Board (STB), the Department of Transportation regulatory agency for railroads rates and services, held a public hearing on “ Rail Rate Challenges Under the Stand-Alone Cost Methodology” (SAC), the traditional STB process to evaluate shipper rate challenges. The SAC is based on the rate a hypothetical competitor would charge to serve the complainant and other shippers in a logical customer group, allowing a reasonable return on investment plus a minimum floor of 180 percent of variable costs, set by statute. Such appeals are costly to all parties, subject to multiple delays, and are viewed as a last resort by shippers. Arizona Electric Power Cooperative, a witness at the STB hearing, testified that it has lodged only two rate challenges in its coal-shipping history, one in the late 1970’s that took more than 10 years to settle and one currently pending, now in its third year (Testimony of Mark Schwirtz, STB Ex Parte No. 657, April 26, 2005).

Meanwhile, the Western Fuels Association and the Basin Electric Power Cooperative (BEPC) have a separate case pending with the STB over rates charged by BNSF to ship PRB coal 175 miles to BEPC’s Laramie River Station. (UtiliPoint Issue Alert, May 10). Shippers expect the BNSF and SP Internet-posted “common carrier” rates to double over the next 20 years and are asking for a ceiling on the rates.

The STB issued a Supplemental Draft Environmental Impact Statement (EIS) on April 15 to respond to a 2003 ruling by the 8th U.S. Circuit Court of Appeals. The new EIS concludes that no additional changes or environmental mitigations are warranted beyond the planned actions presented in 2002 in its first Draft EIS on the Dakota, Minnesota & Eastern Railroad’s (DM&E) proposed 280-mile rail line extension into the Powder River Basin (PRB) and related upgrades of its rail system. Public comments on the Supplemental EIS will be accepted until June 6, after which the STB could complete its Final EIS.

The court had directed STB to reexamine several environmental issues that had raised objections in the first Draft EIS. One was the potential for growth in long-term demand for coal – and associated effects on air quality – as a result of DM&E expansion into the PRB. Using price sensitivity analyses from EIA’s National Energy Modeling System, the Draft EIS concluded that a range of theoretical changes in delivered cost of PRB coal would not cause fuel switching to natural gas (see EIA Coal Transportation Rate Sensitivity Analysis). Further, the analyses conclude that projected changes nationally in coal consumption would be minor – from 0.3 percent less for the highest rate increase modeled to 0.2 percent greater consumption for the lowest rate increase modeled. These national consumption changes would include PRB coal production decreases as great as 2.8 percent and increases as great as 2.5 percent in the highest rate increase and greatest rate decrease cases, respectively, but the net impact of those PRB changes would be mitigated by consumers switching among coals from the PRB and other regions.

Two of the other issues raised – related to locomotive horn noise and ground vibration/noise synergies – were assessed by STB and judged not to warrant additional mitigation. A final issue, related to the preservation of archaeological and cultural sites, has been addressed through a subsequent agreement under provisions of the National Historic Preservation Act, which was not in place earlier.

DM&E President, Kevin Schieffer, noted that in a best-case scenario, construction could begin next year, but that it’s impossible to predict until the regulatory process is completed (WCCO Television News, April 15). Further appeals with STB or with Federal courts may still be filed when the Final EIS is issued. If construction can be started in within the next year, service would begin in 2009 at the earliest (Coal Outlook, April 25, p 12).

The fact that PRB spot prices did not register lasting price gains during 2004 has been attributed to the unavailability of spare rail capacity, especially for spot shipments in the latter 8 months of 2004. Some PRB is burned locally and moved by truck, conveyors, or private railroad, but EIA coal distribution statistics for 2003 show at least 96 percent of PRB coal is dependent on commercial rail transportation out of the region. It now appears that western rail industry improvements in tracks, equipment, and personnel in 2004, continuing in 2005, are helping increase coal haul volumes and turnaround time.

In a 1Q2005 earnings conference call, Union Pacific (UP) President Jim Young told analysts to expect increased shipments throughout 2005 and “continued strength based on overall demand for Western coal.” Mr. Young noted that 15 percent of UP’s PRB shipments currently are priced under its Circular 111 rates, which gives shippers the option for either a 3-year commitment or spot market rates with annual escalators. Circular 111 was adopted in March 2004. UP expects eventually to have all its PRB coal shipped under Circular 111 rates, which shippers’ generally view as more costly to them. CEO Dick Davidson projected that the UP will maintain or improve upon the first quarter pace of coal movements during the rest of this year and stated that UP had the capacity to have hauled more coal in the first quarter “than the ‘coal chain’ has been able to satisfy.” By “coal chain” Mr. Davidson was referring to coal producers, the railroads, and coal-fired generators. He felt that “we could easily have handled 30, 40, 50 more trainloads of coal out of the PRB, except for the fact that one of the portions of the chain broke down and didn’t quite maximize the opportunity” (Coal Outlook, April 25, p 13).

Rail statistics for the 4 weeks ended April 16, 2005, versus the comparable 4 weeks in 2004, reveal that 4.1 percent more coal cars have been loaded this year (Argus Coal Weekly, April 22, p 9). The improvements among the four major carriers are anything but uniform. UP’s improvements in 1Q2005 (above) extend into April, showing a 4,354 average weekly carload, or 12.2 percent, improvement over last year. The Burlington Northern Santa Fe (BNSF) figures, while slightly higher than UP’s, are up only 2.1 percent, or 886 average weekly carloads. BNSF carloadings however, were more consistent than UP’s in 2004, which were below projections in early 2004. Norfolk Southern (NS) carloadings are 1.7 percent higher than a year earlier, but any gains appear to be shipments to the export market (see below). And CSX, after a good early start, has fallen behind last year’s pace for the 4 weeks ended April 16: down 274 weekly average carloads, or 0.9 percent, compared to the same period last year.

While overall statistics have improved, some coal shippers in the East report shortages of coal cars, incidences of Norfolk Southern (NS) deferring service to some customers due to “too much coal in the chain”, and CSX delays in moving trains even when the shipper (Southern Company) supplies its own cars (Energy Publishing, U.S. Coal Review, April 18, p 14). Several sources have suggested that problems with NS result from its reallocating resources to the profitable export market, to the detriment of its domestic power generation and metallurgical customers. On April 27, Wheeling-Pittsburgh Steel filed a lawsuit against Central West Virginia Energy Co, the Massey subsidiary under long-term contract to supply it with 104,000 short tons of met coal per month. Shippers complain that unlike during most of 2004, NS cycle times are chronically below contractual limits and equipment shortages are now common. Both Midwestern and Southeastern power producers have reported the problems (Argus Coal Weekly, April 22, p 9).

Underlying rail coal concerns, however, is a deeper concern over barge shortages among barge and rail/barge shippers. Increasingly shippers report not getting access to enough barges to ship all their coal under contract. When these shipments move by rail to barge transfer yards it has backed up train arrivals and required changes in rail shipping schedules. Ironically, as recently as 2004 barge companies were scrapping some of their older barges to take advantage of high steel prices. Now many are deferring building additional barges until steel prices come back down or until customers are amenable to longer-term transportation contracts, at higher rates (ibid, p 14).

Despite the widely noted concerns over aging waterways infrastructure and the aging and declining barge fleet, coal traffic on U.S. internal waterways was also higher in 2004 versus 2003. The Army Corps of Engineers (ACE) posts "tonnage indicators" for coal and coke, which are preliminary statistics extrapolated from usual routings and waterborne traffic patterns. The tonnage indicators are 144.0 units for coal and coke passed through ACE locks and tally points, up from 136.9 units in 2003. Those statistics are akin to millions of short tons but they appear in dimensionless units because the monthly data on which they are based cannot detect double counting or directional progress of barges, and are not accumulative over time. Data include barges going to transfer docks or Great Lakes or tidewater piers for export. The 7.5 unit difference, year over year, equates to a 4.5 percent increase.  The percentage of increase year over year is useful and valid information, but ACE statistics should not simply be equated with validated distribution data for U.S. coal to final destination. Besides their preliminary nature, the ACE statistics include minor unknown tonnages of coke and of coal shipped to intermediate storage or blending facilities before final delivery .

The ACE statistics foretell a probable 4 percent or 5 percent increase in the 2004 waterborne coal distribution statistics EIA will release this summer. For 2003, the domestic waterborne distribution statistics totaled 114.0 mmst of coal. The January 2005 ACE waterways statistics totaled only 9.1 units for coal, compared with 11.0 units in January 2004, which itself was lower than other recent January totals. The exceptionally low statistics for January 2005 reflect the negative impacts of the sustained flooding in January on the Ohio River and some of its tributaries. The decline in indicated barge tonnage from March to April 2005 seems to confirm accounts in early May of barge shortages. Although February through April barge coal tonnages are ahead of the same period in each of the past four years, demand for barges is apparently still higher.

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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