Coal Prices and Earnings (updated July 5, 2005)

This report includes data and discussions for the business weeks ended June 24 and July 1. In the week ended June 24, there were no changes in the average spot prices indexed by EIA (see graph below). The average spot prices for 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. After climbing from $36.00 to $39.00 per short ton the previous week, the spot price for the 11,800 Btu Illinois Basin (ILB) coal tracked by EIA was unchanged in the week ended June 24. Spot coal prices in the Powder River Basin (PRB) remained at $8.61 per short ton, for 8,800-Btu coal, and average spot prices in the Uinta Basin (UIB) were again unchanged at $29.00 per short ton for 11,700 Btu, low-sulfur bituminous (Coal Outlook, June 27, p 2).

In the week ended July 1, for coal commodities tracked by EIA, the average CAP spot price increased by $1.00 to $61.00 per short ton. The PRB average spot price gained $0.17, selling for $8.88 for the prompt quarter (currently 4Q2005), and the UIB average spot price gained $2.00, rising to $31.00. In each of these cases, however, the apparent change was not what it appeared. The higher values – as well as those that did not change - were all previously reported in Platts Coal Outlook for 4Q2005 deliveries. The mechanism at work was actually the progression to the final weeks of the second quarter, resulting in the fourth quarter rather than the third quarter now being viewed as the “prompt quarter” (Coal Outlook, July 4, p 2).

Average Weekly Coal Commodity Spot Prices Business Weeks Ended June 24 and July 1, 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.

Most coal prices softened during the month of June. Spot prices for delivery in 3Q2005 either declined or stagnated, with the notable exception of the $3.00, or 8 percent, jump in ILB prices in the week ended June 17. The ILB price rise came at a time when inveterate UIB coal consumers were casting about for supplements of high-sulfur coal and UIB producers had answered attractive price offers by adding as much immediate capacity as feasible. Some coal buyers at Midwestern power plants explained that this year utilities are trying to lock in higher tonnages of coal under term contracts than in years past. In their view, coal producers and/or transportation services under utility contracts missed 2004 tonnage targets by more than expected, and they do not want to be forced into the spot market again to pay presumably higher prices for replacement coal. ILB buyers are contracting for 20 to 25 percent more coal than may be needed so as to be in better shape later if only 85 or 90 percent of that coal shows up (Coal Outlook, June 27, p 1).

Adding to a complicated situation, Alliance Resource Partners closed the Pattiki mine in Illinois late on June 16 due to a major belt problem. About a month’s worth of production – currently about 255,000 short tons – is expected to be lost and some customers started seeking spot coal as replacement (Argus Coal Weekly, June 24, p 4). Thus far, Illinois Basin (ILB) spot coal prices are still essentially flat going into 4Q2005 and 1Q2006, with slight increases for the lowest sulfur coal (2.5 lb. SO2 per mmBtu) in 2006. It was reported that one buyer would pay $41.00 per short ton to ensure a supply of the same ILB spot coal currently selling for $39.00 (see graph above) (Coal Outlook, June 27, p 14). There is no inherent boundary between spot and contract prices. It appears that ILB coal buyers, hoping to lock in reliable supplies for this summer, next winter, and beyond, may be obliterating what was left of the difference.

Outside the ILB, deal-making for coal was relatively slow – the end of an extended “shoulder period,” a period each year when electricity demand is lessened and, this year, when immediate demand was subdued following a cool Spring in the service areas of many coal-fired generators. As a result, most spot prices is June appear to be stable, for relatively modest coal volumes.

More significantly, most forward prices for spot coal -- for 1Q2006, 2Q2006.and calendar year 2006 – now adhere to either an increasing or a flat forward price profile. Increasing forward prices, as of the weeks ended June 24 and July 1, include PRB coal and four of the six CAP coals surveyed by Platts Coal Outlook. They increase strongly through 1Q2006, then recede. From 3Q2005 to 1Q2006, the PRB prices increase by $0.65, or 8 percent, and by $1.00, or 16 percent, respectively, for the 8,800 Btu and the 8,400 Btu coals. PRB forward prices for calendar year 2006 are less robust, the average for the 8,800 Btu coal increasing by another $0.15 and that for the 8,400 Btu coal holding steady. The short-term Increasing prices are consistent with being the single largest and most reliable source of low-sulfur coal nationally at a time when sulfur dioxide emission allowances are costly and electricity generation is expected to increase.

The increasing prices for four CAP coals rise from 3Q2005 through 1Q2006 by amounts ranging from $2.00, or 3 percent, for 12,500 Btu, 1.2 lb. SO2 Big Sandy/Kanawha originations on CSX Railroad (the CAP coal tracked on the Figure above), to $8.25, or 15 percent, for 12,000 Btu, 1.2 lb. SO2 Big Sandy/Ohio River originations of barge coal. The rising forward prices indicate that short-term supplies (at least) have been available for those four coal types. At this time, however, buyer interest in spot purchases in those coals falls off sharply by 2Q2006, with average prices returning to or below 3Q2005 levels. The two CAP coals whose forward prices do not increase by 2Q2006 or later, are Thacker/Kenova originations on Norfolk Southern Railroad (Coal Outlook, June 27 and July 4, p 2).

The supply regions with predominately flat prices in Platts’ survey are NAP, UIB, and ILB (discussed above). Northern Appalachia (NAP) is one region where untapped productive capacity and idled mines and reserve holdings have been available to respond to last year’s unmet demand. Consol, Foundation Coal, and other major reserve holders opened new or previously shuttered mine properties. Current spot prices of $53.00 to $56.00 per ton for high-Btu Pittsburgh seam rail coal are historically high but, more importantly, term contracts presumably in the mid-$40’s have attracted investment in new mine development. A critical base level of firm supply contracts at 2005 prices – whatever they now are – is certainly well above the 2003 contract price baseline that coal companies felt was unsustainable. Unlike in the past, however, eastern coal producers in 2005 reassure investors not with the stability implied by having most of their production under contract but with expectations for higher revenue by leaving larger percentages of future production uncommitted and available for possible higher pricing. In 2004, companies that had more than 80 or 90 percent of production tied into long-term contracts missed out on the widespread price increases, even as their own costs from big items like fuel, steel, and power were going up.

Despite the migration of 4Q2005 UIB higher spot prices into the prompt quarter classification shown on the graph above, forward prices remain flat. Spot prices last changed for reasons related to market conditions in the week ended July 2, 2004 (a change in October 2004 was also a result of moving to a new prompt quarter). Why prices remain flat is unclear, especially since Colorado coal production as well as UIB coal production within Colorado, where most coal in the Uinta Basin is mined, have expanded each year from 2001 through 2004. Colorado UIB production grew by 4.8 mmst, or 31 percent, during those four years. Concurrently, Utah UIB production declined by 5.1 mmst, but the decline does not account for the stalled spot coal prices. More than half of Utah UIB production represents dedicated mines or long-term contracts with in-State or regional generating plants – typically not spot market players. In Colorado, only 25 to 30 percent of production is used in the State, and more coal has been available for spot market sales or test burns. The limiting factor remains rail capacity to ship to the east. Topography restricts options to add additional conventional tracks or to streamline loadouts. Increases in shipments may hinge on new efficiencies or denser traffic.

Market Developments (Updated July 7, 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).

After unusual growth in coal exports in 2004 (5.0 mmst over 2003), first quarter exports continue to increase, but at a less frenzied pace. (EIA, Quarterly Coal Report, Table 1, June 24). Exports for 1Q2005 were 10.1 mmst, which equates to 4.6 percent, or about 400,000 tons, more than the same quarter in 2004. The 10.1mmst is about 700,000 tons below the pace in 4Q2005. U.S. coal exports continue to be led by metallurgical coal. While first quarter steam coal exports have declined by 2.2 percent, or less than 60,000 short tons, compared with 1 year earlier, metallurgical coal exports were 7.6 percent higher, or about 500,000 tons. Exports of met coal increased even more dramatically since year’s end, going from 5.5 mmst in 4Q2004 to 7.2 mmst in 1Q2005. Although it is not a one-to-one relationship, some of the additional met coal exported may have been diverted from the steam coal market. Steam coal exports decreased from 5.4 mmst to 3.0 mmst from 4Q2004 to 1Q2005.

Metallurgical coal markets became volatile when the thriving Chinese steel industry in late 2003 and 2004 made outsized demands for coking coal and met coke, driving up prices. Now the flip side of that expansion – diminishing demand – has let met coal prices fall. The decline results not from lower demand for steel and lower steel prices but from mandates by the Chinese government to temper growth in domestic steel consumption and to lower coke production for domestic and export markets, the latter aimed at raising international coke prices (U.S. Coal Review, June 20, p 2). Although the government announced plans to cap the country’s long-term steel production capacity at 300 million metric tonnes, production for 2005 is on a path to reach 315 to 320 million tonnes.

Industry experts disagree as to whether the lower met coal prices will still be around by early 2006 but there seems to be no disagreement that met coal prices are lower now than a few months ago. High-volatile met coal may be selling for $70 to $75 per short ton currently, although some sources claim they can get $80. Low-vol U.S. met coal is said to be available at $85 to $90 per short ton, as supplies remain tight (U.S. Coal Review, June 20, p 13). As coking coal prices have softened, some customers from 2004 are contacting U.S. suppliers demanding to have last year’s prices adjusted down. Ironically, domestic steel production (and domestic coke demand) is down slightly while Chinese production for January through April set new record highs and U.S. steel imports from China went up. Also if met coal prices go $5 to $10 lower, many in the current crop of met coal producers will be reenter the steam coal market.

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 average values declared for met coal brought to ocean terminals for export, from U.S. Customs data. 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 not just spot shipments, variances are less extreme than in some 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 July 6, 2005)

Seven weeks after the derailments and roadbed damage on the southern PRB Joint Line (see CN&M, 6/12/05), blamed largely on exceptionally wet weather and the effects of years of accumulation of coal dust, the Union Pacific Railroad (UP) updated its assessment of the scale and scope of disruptions to normal coal shipments. It now appears that the line will not be ready for “unencumbered” operation before late November 2005. Starting July 6, by the terms of an agreement between Burlington Northern Santa Fe (BNSF) and the UP, a series of major rebuilding projects will begin on switches and selected stretches of the roadbed, including removal of coal dust in about 100 miles of roadbed and replacement of rail and ties in 14 miles. The work is beginning without delay in order to have the most vulnerable lines renewed and stable before next winter’s snow and wet weather. (Union Pacific Railroad, Notice of Disruption on the South Powder River Basin Joint Line, July 1).

The Joint Line is the principal route for PRB coal shipped from the southern part of the basin and, in fact, is the busiest and highest density freight line in the world in terms of gross ton-miles. During June, the UP loaded 31 trains per day on average and BNSF, which owns the Joint Line, loaded about 27.5 trains per day, for a total 58.5 per day. This compares with about 63 trains per day on average for the two railroads prior to the roadbed failures, derailments, and subsequent slowed travel, but does not reflect the fact that BNSF has diverted some of its southern PRB coal shipments northward via its unshared rail line, to alternative routings east or west. The approximate four train-per-day shortfall equates to a 12.3 percent reduction in tonnage normally shipped by both carriers via the Joint Line. UP estimates that “until further notice,” it will be able to ship 80 to 85 percent of previously agreed upon coal demand and will allocate deliveries among its customers proportionately according to those demand figures.

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). Since that time, analysts have revised estimates of total lost shipments for the year to figures such as high as 20 million short tons (see below). Reduced shipments were expected to put pressure on the market for emissions allowances but, since natural gas storage is relatively high at this time, coal delays may mean more expensive electricity in some cases (due to the substitution of natural gas) but should not have a severe effect on reliability. According to Energy Publishing’s Coal & Energy Price Report, one of the major coal producers in the PRB, taking the long view, estimated 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
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Fax: 202-287-1934
e-mail: Richard Bonskowski

Bill Watson
Phone: 202-287-1971
Fax: 202-287-1934
e-mail: William Watson