Coal Prices and Earnings (updated June 21, 2005)

For the business week ended June 17, the only changes in average spot prices were reported for Illinois Basin (ILB) coal, which increased by $3.00 per short ton for the 11,800-Btu coal indexed by EIA (see graph below). The average spot prices in the other major coal supply regions were unchanged. The Central Appalachia (CAP) coal indexed by EIA remained at $60.00 per short ton and the Northern Appalachia (NAP) coal remained at $56.00. The slow climb of spot coal prices in the Powder River Basin (PRB) stalled at $8.61 per short ton for the third consecutive week, for 8,800-Btu coal. The Uinta Basin (UIB) average spot price was again unchanged 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 17, 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.

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 June 22, 2005)

The U.S. Monthly Coal Production (graph below) includes production based on final mine surveys of 2004 by the Mine Safety and Health Administration (MSHA), and initial surveys for 1Q2005. The final estimated 2004 coal production was 1,111.5 mmst, based on final MSHA data. 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 May 2005, was 88.5 mmst (see below). That is 3.1 mmst fewer, or 3.4 percent lower, than in the previous month, but it is 1.2 mmst higher than May 2005. EIA estimates that year-to-date 2005 coal production (through May 31, 2005, versus May 31, 2004) is 456.9 mmst, versus 454.6 mmst in 2004. The net difference through the end of May results from 6.6 mmst more production west of the Mississippi while 5.2 mmst less coal were produced east of the Mississippi.

Note: This graph is based on MSHA-based revisions for all quarters of 2004 and first quarter of 2005, and on preliminary EIA production estimates for April and May 2005.

Transportation (updated June 23, 2005)

Nearly 6 weeks after the derailments and roadbed damage to the southern PRB joint line (see CN&M, 6/12/05), there is still no consensus on the seriousness of the effects on this year’s coal deliveries. The railroads say that impacts were relatively minor, with shipments running 10 to 15 percent below normal by the first week in June, and improving. By the week ended May 28, per data from the Association of American Railroads (AAR), carloadings had rebounded, but train speeds on the joint line were still below normal as of the week ended June 11. From the week ended May 14 through the week ended June 11, the Union Pacific (UP) and Burlington Northern Santa Fe (BNSF) had loaded about 4.9 mmst less coal than would have been loaded over 5 weeks at the rates in effect the week before May 14. The AAR data cover all coal loaded on the two western railroads and do not include information on State or coalfield of origin.

Estimates in an earlier report, on the impact of the mishap on PRB coal shipments, put the lost coal shipments at 6 mmst after 2 weeks. “Those tons are lost forever – they can’t make them up. . . . That’s going to tighten things up, and that assumes you have a normal summer and a normal winter,” according to John Hanou, partner at Hill & Associates (Dow Jones Newswires, May 31). The reduced shipment were expected to put pressure on the heated market for emissions allowances but not to have a severe effect on electricity reliability. According to Energy Publishing’s Coal & Energy Price Report, one of the major coal producers in the PRB, taking the long view, told its correspondent that by the end of 2005 curtailments and repairs on the joint line could reduce shipments by as much as 20 mmst below previous expectations (June 21, pp 1,4).

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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