New Coal Economics
Location: New York
Author: Lee Buchsbaum
Date: Monday, December 29, 2008
A perfect storm of rising world coal demand and falling international
supplies is creating higher prices for U.S. producers who can sell into the
export markets instead of domestically.
Utilities are also facing rapidly escalating railroad transportation
contracts as shippers take advantage of their pricing powers. Major
utilities such as AEP, Duke, TVA and others are either raising rates or
weighing their options while they struggle to contain their fuel costs,
develop new procurement strategies and re-evaluate alternatives.
Driving international demand for both coking and thermal coal are rising
global electrical demand and coal consumption throughout Asia and India, and
production shortfalls in South Africa, Australia and China itself.
Throughout 2008, China has purchased as much Australian, Indonesian and
Vietnamese coal as they can acquire -- even as less is exported from those
producers because of their own growing domestic demands. South American
coal, particularly from Colombia, is finding buyers who will purchase at
higher rates than U.S. utilities, especially Western Europeans.
With the falling dollar, selling to Asia, Europe or South America is giving
coal producers a higher return than selling into the United States. "If I
were running a coal company and I looked at what's happening on Capitol Hill
and the states, I'd be very inclined to send my marketing team overseas,"
said Michael Morris, AEP chairman, president and CEO. "That's where it
appears the growth market is going to be, not here domestically."
In 2007, the United States exported almost 60 million tons of coal. This
year, many expect that figure to be between 80 and 90 million tons.
Estimates for 2009 are even higher at 100 million tons. Through June of this
year, producers sent 40.4 million tons overseas, up 57 percent from 2007.
With dollar devaluation, the "United States is on sale right now," said
James River CEO Peter Socha. Most of what's heading overseas originates in
Central Appalachia (CAPP) where some of the world's best remaining coking
and thermal coal lies. However, after a century of extraction, much of
CAPP's reserves have been depleted.
Prices for coal have remained relatively high. According to Michael Quillen,
Alpha Natural Resources chairman and CEO, those prices continue to escalate
and production remains flat. "Even with dramatic increases in prices, we've
not been able to match it with production. If we could, we would," confessed
Quillen. "The CAPP basin is on an unstoppable downward slope of shrinking
production, and higher prices don't necessarily imply that production can be
re-stimulated. Higher prices are merely having the effect of extending
reserves."
Fierce Competition
With fierce competition to get into the lucrative export market, producers
are selling as much as possible overseas and shortening their contracts.
"It's been a recent trend to leave more market pricing open as part of a
producer's portfolio," said Chuck Zebula, AEP's new senior vice president
and treasurer. Zebula, whose portfolio still includes fuel, contrasts the
current market with years past. "Producers today want as many options as
possible. They don't want to lock up their coal prices for five years
anymore."
With eastern coal moving into the export market, coals that would normally
be sold elsewhere are filling the CAPP void. Northern Appalachia (NAPP) and
Illinois Basin (IB) coals, while garnering higher pricing and being shipped
overseas as well, are more expensive domestically, too. Utah, Colorado and
PRB coals are also traveling further and, recently, are being shipped in
increasing amounts to the West Coast for deep-pocketed Asian customers.
Consequently, fuel managers of major utilities are seeing their costs
escalate. Mike Hendon, senior manager of coal acquisitions at TVA said he's
"never seen prices as volatile as they are now." TVA generates 60 percent of
its energy from coal, burning from 45-47 million tons per year. "We're in a
period of dramatic increases." To cover its costs, TVA is increasing its
rates by 20 percent.
To insulate themselves from transportation disruptions, many large utilities
are expanding their coal sourcing, buying from different basins and
blending. With costs rising for CAPP coal, TVA may increasingly turn to the
Illinois Basin as several new and independent producers emerge, particularly
in western Kentucky and southern Illinois. "We're happy to see the
competition. It's always welcome," said Hendon.
AEP is also mixing and matching. "We're in a unique position because we own
a 600-unit barge fleet," Zebula said. "In this tightly priced market, we owe
it to our shareholders to optimize our system."
Rail is an effective but expensive option. While their rail service has
improved, CSX is now demanding steep haulage prices, says Pat Cummings, fuel
supply coordinator for Rail Transport at Seminole Electric in Florida.
"We're facing huge increases in our rail rates that aren't economically
justifiable in my opinion. But the railroads control the destination point.
For any plant or entity that is served by only one carrier, you're captive
and have no alternative."
In today's marketplace, coal increasingly no longer wins economically. "If
coal stays at $100-$150 a ton, and if natural gas remains as low as it is or
continues to fall in price, a lot of utilities will look at gas instead,"
said Hendon. It's going to be interesting to see what pressure that puts on
the coal market: $120 coal versus $7 gas. "We're at that point now with CAPP
coal. Gas is becoming a viable alternative."
Like it or not, coal is part of a global economy. The railroads and the
producers understand that. And they are looking to the highest bidder, which
is increasingly overseas.
Copyright © 1996-2006 by
CyberTech,
Inc.
All rights reserved.
|