Coal outlook good, but could be approaching generation limits

Coal outlook good, but could be approaching generation limits

Washington (Platts)--6Jun2005


Fundamentals are in good shape for the coal industry heading into the summer,
analysts said Monday, but others wondered if US coal-fired generation is
approaching its limits.

Merrill Lynch analysts Daniel Roling and David Lipschitz said the summer is
looking good for the US coal industry. Powder River Basin coal was trading on
the spot market at $8.05/ton, up 34% from last year; test burns in the East as
well as continued rail improvement have increased demand for PRB coal; Central
Appalachian coal was trading at $57.50/ton, up 8.5% for last year; and
Northern Appalachain prices traded flat, as spot market prices hit $35.75/ton,
representing an increase of 32.4% over last year and up from the recent low of
$33.50/ton.

"Inventories at utilities continue to remain tight, even with improving
transportation out of the West," they said. "Weather was not the drive for
coal consumption as the heating season was warmer than normal."

The Energy Information Administration just revised downward inventory levels
at utilities held by the power sector for February to 98.7-mil tons from
99.3-mil tons. In addition, it lowered January stockpile estimates to 97.9-mil
tons from 106.7-mil tons. March's inventory levels were estimated at 104.9-mil
tons.

"This is a positive for the coal industry as we believe inventories...for
March are 7.2% lower year-over-year, slightly higher than the February
figures," Roling and Lipschitz said. "This equates to approximately 38 days of
supply, based on 84.1-mil tons of consumption in March."

They said their estimate for April's days of supply are slightly above the new
industry "norm" of 40. But their estimate of 112.7-mil tons, or 43 days of
supply, was the lowest inventory level for April in the last 10 years.
According to EIA, heating-degree days year-to-date through March were 3.3%
below the prior year period, and the 12 months ended in March were 4.1% below
the prior 12-month period.

It's "incredible that we are below 2003/2004 heating degree-day levels, yet
inventory levels continue to decline," the Merrill analysts said. But analysts
at First Energy Capital say US coal-fired generation is approaching its limit.

"With coal-fired generation output seeming to have plateaued and overall power
loads starting to push the limits of coal-fired generation market, we believe
that 2005 may mark a significant opportunity for other fuels to make a
significant contribution to the power generation mix this summer," said
analyst Martin King. "Since 1997, the US has not seen any appreciable increase
in coal production with production hovering around 1.1-bil short tons. For
2005, we expect only a slight increase over 2004-levels, consistent with just
the gain seen in production levels for 2005-to-date of 0.3% versus the same
period in 2004."

Coal-fired generation reached its highest level in 2004, but that was from
increased utilization rates and not new capacity. King said the primary
problem isn't accessing the reserves, but limitations on the transportation
system.

"With virtually all coal consumed in the power generation sector being shipped
by rail, it has been the limitations of the rail system that appear to have
kept coal production essentially treading water for the past several years."
King said an added complication has been the growing emphasis on low-sulfur
coal, the majority of which is found in the West and must be transported to
the large utilities of the East, which have been slowly reducing its
dependence on the higher-sulfur Appalachian coals.

"Between constraints in the rail system for moving coal, which is contributing
to a steady erosion on coal stocks held by power generators, and the lack of
any significant additions to overall coal-fire generation, we believe that the
United States is starting to bump up against constraints in how much
electricity it can generate from coal."

This story was originally published in Platts Coal Trader
http://www.coaltrader.platts.com

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