Coal Prices and Earnings (updated August 11, 2005 )

In the week ended August 5, for coal commodities tracked by the Energy Information Administration (EIA), spot price activity includes another increase in the Powder River Basin (PRB) and a further drop in Illinois Basin (ILB, see table and graph below). The PRB average spot price continued upward, gaining $0.43 per short ton and selling for $10.36. Average spot prices for 1Q2006 were up to $10.58 and to $10.90 for the calendar year (Coal Outlook, August 8, p 2). Although PRB prices have risen steadily since early March, a $1.35 increase over the preceding 4 weeks constitutes a 15.0 percent rise in prompt quarter spot prices. That is the largest 4-week increase since March 2001, when surging natural gas prices and volatile wholesale power prices during the previous 5 months spurred a sudden, but relatively short-lived, expansion in coal-fired generation and run on coal supplies. This time there is consensus among analysts that demand for PRB coal will remain strong and prices will remain elevated owing to the expected duration of constrained PRB coal traffic, the heavy electricity demand during a hotter-than-normal summer, and the fact that coal stockpiles at power plants are low compared to historic averages. The average ILB coal spot prices reported in Coal Outlook declined by $1.00, to $34.00 per short ton, for coal rated at 11,800 Btu and 5.0 lb. sulfur dioxide. This came after a sudden $4.00 decline the previous week. ILB spot prices are still not consistent, however. Spot prices in SNL Coal Report for the same coal have been unchanged since June at $38.25 (SNL Coal Report, August 8, p 25). Neither report shows significant changes in forward spot prices through 2006.

Until more scrubbers come on line, flat ILB prices would be understandable considering the hefty upsurge in the past month in sulfur dioxide allowance prices and the fact that ILB coal ranks high among coals in sulfur dioxide produced per mmBtu. The shortfall in planned deliveries of low-sulfur PRB coal has stimulated higher sulfur dioxide allowance prices, as some major coal consumers had to supplement stockpiles with higher-sulfur coals. During July, sulfur dioxide futures for 2005 started the month at $765 per ton and reached $875 on July 25, nearly matching the all time high of $880. As of August 3, the average for 2005 allowances was $861.67 (evomarkets.com, Daily Trades on 8/03/05).

The average Northern Appalachia (NAP) spot price remained at $52.50 per short ton. The Central Appalachia (CAP) price did not change from its $61.00 price of the previous 4 weeks. For the 11,700-Btu Uinta Basin (UIB) coal rated at 0.8 pounds of sulfur dioxide per million Btu, the average spot price remained at $31.00 per short ton (Coal Outlook, August 1, p 2).

Average Weekly Coal Commodity Spot Prices Business Week Ended August 5, 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.

Coal-related activity and news releases over the past several weeks reflect continued concern over the availability and delivery of coal supplies. Arch CEO Steven Leer, noting that several Arch customers who normally burn only PRB coal “have inquired recently about the availability of tons” from other coal regions, concluded that this is “almost unprecedented” and that their coal inventories must be “at critical levels” (U.S. Coal Review, August 1, pp 7, 20). On the other hand, the July 22 situation report by Union Pacific (UP) indicated, cautiously, that coal loading rates were better than expected: “If we are able to sustain the progress we have made through the first 20 days of July, we may adjust the allocation of train slots upward. ”  PRB coal supplies and prices captured much attention following the release of earlier online reports by UP and the Burlington Northern Santa Fe (BNSF) railroads on the lengthy duration of coal shipment curtailments.

Recent data from UP tells of continuing improvements in its Joint Line coal traffic. The average through July was 33.2 coal unit trains per day out of the southern PRB per day, compared with 30.2 per day for June and 28.5 per for May (the lost shipments all being in the second half of May). At that rate, the UP was moving out 90 percent of the 36.0 trains per day customers and mine operators would have liked, but those targets, known as the NCTA demand, are variable. The NCTA demand targets are arrived at by the railroads in consultation with the PRB mine operators and their coal customers, based on realistic assessments of mine capacity, train availability, and customer stockpiles. The parties may agree to raise the goals in a month, such as July, following a month, such as June, when deliveries fell short of the NCTA demand. In reality, in most months, the NCTA quotas are not actually met, because of many reasons, such as effects of weather on mines or railroads, rail capacity or equipment availability, or problems at the receiving end (personal communication, Jerry Klym, UP Business Director, Marketing and Business Development, August 4).

Based on the reported numbers of unit trains of coal leaving the southern PRB per day, EIA estimated on July 19 that coal shipments on the Joint Line were down by 3.1 mmst for the 15 days following the mid-May rail damage. UP’s Joint Line slowdown estimates going forward, based on a loss of 4 to 5 unit trains’ shipments per day, equated to about 2.0 mmst per month. At that rate, missed coal shipments through December would total 17.1 mmst. Using UP’s updated report of July 22, EIA calculates that its Joint Line shipments were down by 6.2 mmst cumulatively by the end of July, but that UP’s better-than-expected performance to date would equate to a lesser 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 could 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 . . .” Since late July, several weeks including multiple days of above-average heat have affected the Midwest and East.

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.

Since natural gas storage is relatively high at this time, some power producers may substitute natural gas power generation; others may turn to other, higher-sulfur coals. Both options would imply more expensive electricity. Natural gas prices at $7.50 mmBtu (Henry Hub) are presently stable but are high relative to coal for power generation, and over the counter sulfur dioxide allowance prices for 2005 have been near the record high price of $880 (Evolutionmarkets.com, July 28).

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.”

Market Developments (Updated July 19, 2005)

Three 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.

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Contact(s):

Rich Bonskowski
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e-mail: Richard Bonskowski

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