Rising US Coal Prices

Rising US Coal Prices

No 'push back' to spot prices seen by Platts analyst

"At current production costs of coal, spot coal prices can move up quite a bit and not fear displacement from natural gas — there isn’t much ‘push back’ on coal producers," Platts Analytics managing director of forecasting, Steve Piper, told attendees Sep 27 at Platts 27th annual Coal Marketing Days conference in Pittsburgh.

While touching most US coal production bases, Piper concentrated mainly on the current and future prospects for Powder River Basin (PRB) coal. Despite spot price run-ups in the East in the past year or two, PRB spot prices have remained relatively flat, in part due a softening gigawatt-hour demand and a general slowness in new coal-fired generation.

"A lot of that could change. I may stand here a year from now and tell you there’s a completely different picture, but if I had to make the call today I’d be a little bit on the bearish side with respect to overall PRB prospects," Piper said.

Transportation constraints affecting western coal may be hindering the movement of PRB spot coal, and while eastern customers have largely maxed out on their coal blending capabilities, they have not yet fully committed to the kinds of boiler modifications that would significantly increase PRB coal demand, Piper said.

"If I had to make the call today I’d be a little bit on the bearish side with respect to overall PRB prospects." — Platts Analytics managing director of forecasting, Stephen Piper

The large price increases enjoyed by Central Appalachian (CAPP) coal producers have increased end-users’ interest in other options, such as Colorado and Utah bituminous coals, as well as Northern Appalachian (NAPP) coals. "Particularly with scrubbed plants, you can pay a significant premium on your SO2 allowances price and still make it economical to go to a higher-sulfur bituminous coal, and, in fact, now we’re seeing mid-sulfur bituminous coal from the Northern Appalachian region moving in parity with compliance coal on a spot price basis. We’re not seeing the typical discounts associated with the higher sulfur coals relative to compliance coals.

"It’s a bit of a surprising result, and we imagine it’s a short-term phenomenon," he said, adding that end-users looking to substitute, to this point, have not looked to sub-bituminous spot coal options.

"Certainly favoring the PRB," though, "is the trend for putting move volumes under contract. If you look back at the last several years, contracted portions started to move up after the 2001 price surge in the PRB as a defense against those increases." While "the 2004 year-to-date indicates a decrease in percentage of volumes under contract, anecdotally, we’re seeing more volumes going under contract this year, mainly short duration, one- to two-year contracts," he said.

Factors which may constrain the growth in PRB coal demand include a lack of baseload demand due to mild weather, a continuing mild economic recession, industrial customers moving production overseas, operating efficiency improvements through utility consolidations and increased nuclear energy production.

Forecasting out five years, Piper described PRB coal, particularly southern PRB coal as "the swing supply for North American production — it’s got the ability to respond to upticks in demand, but … when there isn’t an uptick, it’s what gets backed down first."

Noting earlier forecasts on 35-mil-40-mil tons of PRB growth by 2006, Piper moderated that figure, instead foreseeing a maximum total PRB growth of 26-mil tons by 2008, about 16-mil tons of that being from southern PRB mines, numbers which match well with anticipated increases in rail transportation capabilities.

In concluding, and in a question-and-answer session, Piper made several additional points:

-- Illinois basin coal production "may actually decline slightly, unless we get some movements on key projects." Nevertheless, there have been upward spot coal price movements, but its geographic reach is limited, so growth is most likely to occur in minemouth opportunities.

-- China’s rapid expansion rippled through the supply chain; shipping rates surged making international coal less competitive; world met coal prices increased due to steelmaking demand and diverted supplies from the steam coal market; reserves are shrinking, while permitting of reserve development is slowed.

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