Coal Prices and Earnings (updated September 6, 2005)

In the business week ended August 26, spot coal prices made big gains in the Illinois Basin (ILB) and receded in the Powder River Basin (PRB, see table and graph below). The ILB coal tracked by the Energy Information Administration (EIA), rail-delivery coal rated at 11,800 Btu and 5.0 lb sulfur dioxide, gained 21 percent in value when it sold for $41.00 per short ton, versus $34.00 a week earlier. A similar price rise (not in EIA’s graph) was reported in Platts Coal Outlook for 11,000 Btu/5.0 lb, barge-delivery ILB coal. Yet a month earlier, when values declined suddenly for those two coals (with typical ILB sulfur levels), the spot price moved up instead for reduced-sulfur ILB coal, rated at 11,500 Btu and 2.5 lb sulfur dioxide. The reasons for the erratic movements in ILB prices are not clear, especially since sulfur dioxide emission allowance prices for 2005 have been increasing since mid-June. Most users of ILB coal need to own and use emission allowances. Prices preceded any effects from Hurricane Katrina.

The Powder River Basin (PRB) average spot price paused in its upward trend and gave up $0.12 per short ton in the week ended August 26. The 8,800 Btu PRB coal tracked by EIA sold for $10.37 for prompt quarter delivery. Average forward spot prices also each declined by $0.12: 1Q2006 delivery down to $10.52, 2Q2006 down $10.50, and calendar year 2006 down to $10.70. The average Northern Appalachia (NAP) spot price remained at $52.50 per short ton. The Central Appalachia (CAP) price did not change from $61.00 per short ton and, for the 11,700-Btu Uinta Basin (UIB) coal tracked by EIA, the average spot price remained at $31.00 per short ton (Coal Outlook, August 29, p 2).

Average Weekly Coal Commodity Spot Prices Business Week Ended August 26, 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.

The reason for the PRB price decline is unknown – the prices themselves could be the issue, or timing. Average coal inventories at consumer sites are assumed to be at or near record lows, based on EIA’s latest (end of June) data from electricity generators and based on cooling degree-days and electricity demand being well above norms. Still, by the end of August, electricity producers – who have been through a high-demand, hot summer in the areas of the country where coal is the primary fuel for baseload power plants – can now count on an autumn respite within a month or two and most can reliably anticipate that existing coal stockpiles will last through the remaining summer loads. The pause in spot price increases may indicate not that demand is slipping but that coal consumers have enough term coal under earlier or newly signed agreements that they can rely on them for now. The consensus among analysts, however, that demand for PRB coal will remain strong and prices will remain elevated in 2005 and 2006 is based on solid fundamentals, including expected growing demand for power and an extended need to rebuild consumer coal inventories.

Also, an unexpected development added to the shortfall reported in coal shipments from the southern PRB. The railroads say that since the beginning of August, 70 percent of missed trainloads are attributable to the mines. Union Pacific reports that mines were unable to load because of problems such as landslides in the pits, lack of coal inventory, and equipment upgrades. Burlington Northern Santa Fe claimed that issues unrelated to the track maintenance have occurred at several mines and impacted coal loadings on the Joint Line in the last two weeks of August. As a result, average daily coal train loadings on the Joint Line in the week ended August 27 were below the 60-train average maintained during the previous month and half of accelerated maintenance (Coal and Energy Price Report, August 30, p 3).

Market Developments (updated September 2, 2005)

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 include data available through June 2005. They show 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)

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 1mmst 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).

Coal Production (updated September 6, 2005)

Monthly coal production for July 2005 was 89.8 mmst (see graph below). That was 2.6 mmst fewer, or 2.8 percent lower, than the same month a year ago. It also represents a 3.8 mmst decrease from June 2005 production. Even though the reduction in expected southern PRB coal deliveries was concentrated in May and June, following the mid-May derailments, miners’ vacations in July may have lessened July production. EIA estimates that year-to-date 2005 coal production (through July 31, 2005, versus July 31, 2004) is 646.9 mmst, a gain of 0.7 percent over the 642.1 mmst in 2004. The net difference through the end of June results from 7.5 mmst more production west of the Mississippi while 0.6 mmst less coal were produced east of the Mississippi. The sources of that decline can be traced to lower production in several of the major producing States, primarily Illinois, Indiana, eastern Kentucky, and Virginia.

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 July 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