Coal Prices and Earnings (updated July 27, 2005)

In the week ended July 22, for coal commodities tracked by the Energy Information Administration (EIA), the only movement in spot coal prices was in the Powder River Basin (PRB). The PRB average spot price continued upward, gaining $0.25 per short ton and selling for $9.66. Although PRB prices had been rising steadily since early March, last week’s price increase along with a 40-cent gain a week earlier have quickened the pace and pushed prompt spot prices above some recent futures prices. There is broad consensus among analysts that demand for PRB coal will remain strong and prices will remain elevated in view of their assessments of the duration and degree of constrained PRB coal traffic. Those assessments agree on curtailed PRB shipments for essentially the rest of the year at volumes 15- to 20-percent behind planned contract shipments (see below).

The average Northern Appalachia (NAP) spot price remained at $52.50 per short ton (see table and graph below). The Central Appalachia (CAP) price did not change from its $61.00 price of the previous 3 weeks. Average spot prices in the Illinois Basin (ILB) and the Uinta Basin (UIB) were also unchanged in the week ended July 22. The ILB average spot price tracked by EIA, for coal yielding 11,700 Btu per pound and 5.0 pounds of SO2 per million Btu, remained at $39.00 per short ton. For the 11,700-Btu UIB coal rated at 0.8 pounds of SO2 per million Btu, the average spot price remained at $31.00 per short ton (Coal Outlook, July 25, p 2).

Average Weekly Coal Commodity Spot Prices Business Week Ended July 22, 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.

Industry activity and news releases over the past several weeks reflect concerns over the availability and delivery of coal supplies. In the United States, PRB coal supplies and prices continue to command much attention following the release of information by the Union Pacific (UP) and the Burlington Northern Santa Fe (BNSF) railroads on the lengthy duration of coal shipment curtailments. The project on the southern PRB Joint Line to rebuild roadbeds and to replace turnouts, switches, track, and ties started July 6 and runs through December 1, 2005. On July 18, Roger Nober, chairman of the Surface Transportation Board, warned of possible electricity brownouts, due to the southern PRB coal supply shortfall, as the peak summer period of electricity consumption begins. Mr. Nober said, “There is the possibility, of course, that individual utilities who were low on stockpiles for whatever reason may find themselves short now . . . We want to avoid – if at all possible – utilities running out of coal and having to brown out.” (Reuters, July 18). This statement was qualified by Mr. Nober’s assessment that the situation is improving, “It’s much better now than three weeks ago. I’m cautiously optimistic that maintenance is going quickly and that throughput is improving and that carriers are adjusting.” He also noted that the impact of any coal shortages would be felt most strongly in the Midwest and Great Plains, where Powder River Coal accounts for a large portion of the power generation.

On July 21, the North American Electric Reliability Council (NERC) issued an open letter to NERC Regional Managers with a subject line, “Urgent Request – Effects of Reduced Deliveries of Powder River Basin Coal.” According to the letter, “The White House has directed the U.S. Department of Energy (DOE) to assemble a team consisting of DOE, NERC, railroads, and fuel suppliers to evaluate the situation. As part of this effort, NERC is expected to provide information regarding any reliability and adequacy implications of this fuel supply disruption.” The NERC managers were asked to answer by July 29 a series of detailed questions regarding the adequacy of their coal supplies, of alternate fuel reliability, and of any preparations for bulk power purchases and transmission.

In early and mid-June, analysts estimated that total lost shipments for the year could reach 20 million short tons. Since then reported shipment figures have been less dire. Based on the reported numbers of unit trains of coal leaving the southern PRB per day, on July 19 EIA estimated that coal shipments on the Joint Line were down by 3.1 mmst for the 15 days following the mid-May rail damage and were down by 5.2 mmst cumulatively by the end of June. UP’s estimated Joint Line slowdowns going forward, based on projecting a loss of 4 to 5 unit trains’ shipments per day (not 3 to 4 as noted here earlier), equated to about 2.0 mmst per month. At that rate, missed coal shipments through December would total 17.1 mmst. Now, using the updated report of July 22, EIA calculates that UP’s better-than-expected performance to date would equate to a more optimistic slowdown going forward, averaging 834 thousand short tons monthly. That would total only 10.2 mmst of missed coal shipments through December. Since it cannot be taken for granted that current roadbed repair rates will continue, 17.1 and 10.2 mmst can be considered reasonable upper and lower bounds for the reduced cumulative PRB coal shipments by UP in 2005.

Whatever the UP shipment reductions eventually total, the impacts on customers should be somewhat less. This is because BNSF exclusively owns the northern lines in the PRB, which serve the southern PRB Caballo mine and all northern PRB mines in Wyoming and Montana. In 2004 those mines produced 29.8 percent of the 430.0 mmst of PRB production in both States, and they are unaffected by the Joint Line problems. In addition, the BNSF is able to transfer some additional southern PRB shipments normally on the Joint Line to its northern PRB tracks. Tom Kraemer, BNSF Group Vice President Coal Marketing, noted that several weeks after the mid-May derailments BNSF shipments were nearly back to normal levels. As of July 21, BNSF month-to-date coal shipments were 5 percent ahead of the same period last year and were operating at a rate 2 percent higher than the above-average April 2005 rate, prior to the Joint Line problems. According to Mr. Kraemer, BNSF expects PRB coal haulage to continue to improve through 2005 because some northern mines have accelerated shipments and BNSF is able to divert some shipments from southern PRB mines to its northern lines, as conditions permit. (personal communication, July 21, 2005). In the same vein, BNSF explained in a July 26 earnings conference call that the first phase of repairs is on a double-track stretch of the Joint Line. The effect on shipments is pronounced because all trains, in both directions, must use the single-track sections that remain open. After the middle of August, train velocities should improve as repairs move to triple-track sections, giving trains two remaining tracks to use (Dow Jones Newswires, July 26, 10:31 a.m.).

Reduced coal shipments alone should not have a severe effect on electricity reliability, but they will reduce coal inventory – at some power plants more than at others – and they increase the vulnerability at those plants to the effects of other system strains. The strain that could degrade electricity supply most severely would be unusually high electricity demand, and that is precisely what has occurred during the past 2 weeks. On July 27, Edison Electric Institute announced, based on its “Weekly Electric Output” survey: “The U.S. electric power industry has set a new record for power demand, providing 95,259 gigawatthours (GWh) for the week ending July 23, and eclipsing by 5.3 percent the previous record of 90,468 GWh set back in August 2002 . . . As searing heat and humidity continue to blanket much of the country . . .” Among the power generators reporting record demand owing to extreme heat::

• Tennessee Valley Authority (TVA), on July 25 saw a new electricity consumption record, above 30,000 megawatts for the first time in TVA’s 72-year history
• Southern Company, serving customers in four southeastern States, set a new peak demand record for the system of 37,376 megawatts, between 3 p.m. and 4 p.m. on July 25
• Commonwealth Edison, serving the Chicago area and Illinois, broke a Sunday record for peak use as customers used about 20,600 megawatts on July 24
• Consumers Energy in Jackson, MI, set an hourly peak demand record for dates in July of 8,191 megawatts on July 25, from 4 p.m. to 5 p.m.
• PJM Interconnection, the power grid operator in the Mid-Atlantic, said on July 27 that it reduced voltage in Maryland, Virginia, and the District of Columbia to reduce strain on the system
• New York’s Consolidated Edison set a peak electricity demand record on July 26, of 12,551 megawatts, which was in turn broken on July 27, when peak demand reached 12,792 megawatts

In the regions of the country where coal competes as a generation fuel, electricity generation was 4.7 percent higher in the week ended July 15, compared with the same week in 2004. For the week ended July 22, more timely data was available for cooling degree days, an important gauge of summer electricity demand, that showed a very significant 33.5 percent increase over the same week in 2004, and a 22.4 percent increase over the 5-year average for the week (Legg Mason, Coal Supply and Demand Indicators, July 26). The strain put on demand for coal and natural gas supplies in August, September, and October depends primarily on whether above-average hot weather returns for any long periods in the Great Plains, Midwest, and Southeast.

Meanwhile, the reductions in supply and lower stockpiles of low-sulfur PRB coal are putting pressure on the market for emissions allowances, as some producers turn to higher-sulfur coal. Since natural gas storage is relatively high at this time, other power producers may substitute natural gas power generation. Both options would imply more expensive electricity because over the counter SO2 allowance prices for 2005 settled on July 27 at $830 per ton and spot prices around $850 per ton, nearing the record high price of $880 (Evolutionmarkets.com, July 28), and natural gas prices at $7.50 mmBtu (Henry Hub) are presently stable, but high relative to coal for power generation.

Coal markets may be sensitive to customers’ beliefs that the latest reduced delivery schedules will bring their already low coal supplies still lower. It is inevitable that some customers – either due to reduced PRB coal receipts or other supply chain problems – will be in worse shape than others. The railroads are attempting to distribute the available shipping capacity fairly and equitably to existing customers while also balancing pleas for urgent shipments where coal stockpiles are especially low. On July 18, UP announced an embargo on all new contracts for coal shipments on the southern PRB Joint Line. Some shippers have tried “to compel Union Pacific to carry larger shares of coal for them by asking for new rates” (i.e., offering to pay higher rates). UP states that its commitment under the current “constrained transportation capacity” is to its customers “under currently active contracts or common carrier rate items.”

In its Form 8-K filed with the Securities and Exchange Commission on July 15, Xcel Energy states that coal inventories are low at two of its subsidiaries – Public Service Company of Colorado and Southwestern Public Service Company. As a utility, Xcel’s filing indicates that it expects to recover higher costs it may incur from plans to conserve coal, which may include modifying dispatch at generators, using more natural gas, or purchasing power and reducing wholesale power sales (Argus Coal Daily, July 18, pp 1,3). Meanwhile, the Colorado Springs (Colorado) Department of Municipal Utilities noted that its coal stockpiles are down to 40 and 30 days’ supply at its two coal-fired power plants, which are normally maintained at 45 days’ supply. The utility went on record that its UP-delivered supplies of PRB coal would be down to 20 days’ supply by year’s end if no improvements in service are made before then (Coal Outlook, July 18, p 4).

The Tennessee Valley Authority (TVA) moved to solidify low-sulfur coal supplies by requesting authorization for two 6-year contracts for as much as 30.8 mmst and 6.0 mmst, respectively, of PRB coal from Thunder Basin Coal Company and from Kennecott Energy and Antelope Coal Company. The TVA board of directors meets on the request on July 22 (Coal Outlook, July 18, p 3). In the West, Peabody Energy has officially decided to initiate a long-rumored expansion at the Twentymile mine in northwestern Colorado. The mine produced 8.7 mmst of low-sulfur bituminous coal in 2004. It plans to boost production by 2008 to 12 mmst with a new state-of-the-art longwall mining system. Installation is scheduled to start in 1Q2006. Peabody believes the additional production can be shipped despite longstanding transportation bottlenecks because of recent rail improvements near Denver (SNL Coal Report, July 18, p 7).

Alliance Resource Partners’ Pattiki mine, which had to go off line on June 16 due to a major belt problem, has reopened. The operator was able to resume production on July 21 (SNL Coal Report, July 25, p. 11). Based on production rates prior to the shutdown, the 5 weeks’ lost production would amount to about 318,000 short tons.

Market Developments (Updated July 19, 2005)

Three new developments affecting coal imports took place in mid-July. On July 14, Alpha Natural Resources announced that it and partners Arch Coal, Dominion Energy, and Peabody Coal will build a new $20-25 million coal import facility, to be located at Dominion Terminal Associates (DTA) coal pier in Newport News. VA. The DTA pier was configured for and is used for coal exports and DTA had previously indicated that handling imports at its existing operations would not be practical. The new facility, however, will interconnect with existing storage and transloading assets to allow imported coal to be offloaded, stored, reclaimed and blended, and shipped, according to customer coal quality specifications. It will also be possible to blend imported coal with domestic coals stored on site (Coal Trader, July 15, pp 1, 5). Also, on the east coast, Massey Energy introduced imported coal – likely from the La Jagua mine in Colombia – to potential new customers by bringing it to their doorstep. Massey brought a cargo of the coal to Brunswick, GA. Some was committed and some was available for sale, aimed primarily at industrials that could not take a shipload on their own. Massey hopes to grow the Brunswick market to 450,000 metric tonnes in the next two years, and to replicate success it has had in a similar venture in Portland, ME. In 2005, Massey will bring 250,000 metric tonnes into Merrill’s Marine Terminal in Portland (Coal & Energy Price Report, July 14, pp 1-3). The third development was the confirmation that Kinder Morgan’s (KMT) Shipyard River Terminal in Charleston, SC, will go forward, expanding import capacity from 2.5 mmst in 2005 to 6.0 mmst by 2007 (Coal & Energy Price Report, July 18, pp 1, 4).

Hill and Associates of Annapolis, MD, is tracking announced and planned coal import developments. It believes that the import market in the United States, which was 27.3 mmst in 2004, has the handling capacity to take 34.5 mmst in 2005 and could reach 59.0 mmst in 2007, based on a host of large and moderate-sized import facility upgrades. (By comparison, although EIA’s Short-Term Energy Outlook does not currently cover 2007, it incorporates U.S. coal import forecasts of 32.7 mmst for 2005 and 35.5 mmst for 2006. The 2007 coal import forecast in EIA’s 2005 Annual Energy Outlook, released in December 2004, was low (29.2 mmst) in view of subsequent 2004 and 2005 monthly coal import levels, and has not yet been updated.) In addition to the DTA facility described above, which Hill and Associates sizes at 3.0 mmst per year, is a 12.0 mmst capacity increase at ASD-McDuffie Terminal in Mobile, AL, announced several weeks back, and with the strong endorsement of the Southern Company. That is followed by the KMT Charleston facility as well as a 1 mmst increase at KMT’s Fairless Hills facility in Pennsylvania. More speculative, but with believers, is a 3.0 mmst expansion at the JAXPORT facility in Jacksonville, FL, and a 2.0 mmst expansion at the CNX Marine Terminal in Baltimore, currently owned by Consol (Coal & Energy Price Report, July 18, pp1,4).

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.

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

Coal Production (updated July 18, 2005)

Monthly coal production for June 2005 was 93.6 mmst (see graph below). That is 1.5 mmst fewer, or 1.6 percent lower, than the same month a year ago. It also represents a 5.1mmst increase over May 2005 production, in which several million short tons of expected southern PRB coal deliveries were lost following the mid-May derailments. EIA estimates that year-to-date 2005 coal production (through June 30, 2005, versus June 30, 2004) is 557.1 mmst, a gain of 1.3 percent over the 549.7 mmst in 2004. The net difference through the end of June results from 9.5 mmst more production west of the Mississippi while 2.1 mmst less coal were produced east of the Mississippi.

The U.S. Monthly Coal Production graph (below) includes production based on final mine-level reports for 2004 by the Mine Safety and Health Administration (MSHA), and its initial reports for 1Q2005. The final estimated 2004 coal production was 1,111.5 mmst, based on completed 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.

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 through June 2005.

Transportation (updated July 28, 2005)

Coal transportation problems related to the southern Powder River Basin Joint Line rebuild are affecting prices and coal supplies and are discussed above. CSX railroad has told the Surface Transportation Board (STB) that it will be positioned to handle additional western coal shipment moving east of the Mississippi by the end of 2005, when “significant investments” are completed to improve its St. Louis “Gateway” and its connecting routes. In a letter to the STB, Michael Ward, chairman, CEO, and president of CSX, said the improvements will allow CSX better to meet fall peak season demand by making it easier “to satisfy the demand of its utility customers for western coal.” Norfolk Southern (NS) chairman and CEO, David Goode, told the STB that NS coal volumes in 2Q2005 reached an all-time record high, surpassing the previous high set in 4Q2004. Goode noted that although NS utility customers’ coal stockpiles had improved over the past 6 months, current demand takes all available coal shipments, keeping supplies tight. Goode hoped that mine operators could further expand production. He also advised that new coal traffic flows present problems for the railroad. “The combination of new movements of imported coal on NS and the continued purchase of coal from non-traditional origins by NS-served utilities continues to challenge the traditional coal supply chain as distances from coal sources to coal consumption points lengthen and new origins fall outside normal empty coal car staging areas,” Goode said.

With the cooling of growth in the Chinese steel industry this year, ocean bulk carrier rates are continuing to decline. During the last week in March, coal shipping rates from U.S. Gulf ports to the ARA (Amsterdam/Rotterdam/Antwerp) European gateway reached $30 per metric tonne. By July 1, the rates for the same shipments were down to $15 for the 70,000-tonne Panamax carriers. Similarly, averaged rates from Hampton Roads to Japan, via 150,000-tonne Capesize vessels, having peaked at about $52 per metric tonne in mid-April, fell to $23 in mid-June, before nearing $28 on July 1 (Simpson, Spence & Young, Resources, Free Charts, July 19). The low shipping rates, which can surge back up with changes in demand, are good for metallurgical coal exports, although with demand and prices for met coal down, many overseas customers have been seeking coal price rebates as well. Indian steam coal demand continues to grow, however, while its domestic coal producers have been unable to increase productivity and meet that demand. This continues to be an active season for Indian power producers shopping for additional steam coal imports.

View Earlier Coal News and Markets Reports

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