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Coal Outlook Stable and Improving Slowly Despite Market Disruptions
June 2006
The tragic coal mining accidents of January 2006 in West Virginia brought increased exposure and scrutiny to the coal industry as the year began, threatening to disrupt a stable and improving supply and price situation. Just as electricity generators were finally beginning to increase their depleted inventories due to mild weather conditions, Mine Health and Safety Administration (MSHA) officials descended on coal mining operations in an effort to improve enforcement of MSHA regulations. The Governor of West Virginia temporarily suspended operations at all of the state’s coal mines on February 1, in order to engage all mine personnel in a thorough review of safety procedures and, while the suspension was short-lived, the supply disruption was real.
Notwithstanding the challenges of January and February, coal production year to date through mid-March is up about 1% nationwide and West Virginia production has actually increased 2.5% compared to the same period in 2005. The events of January may actually benefit production in some cases by correcting hazardous situations and identifying inefficiencies. Production east of the Mississippi River is up 0.5% year to date and production west of the Mississippi is up 1.3% compared to 2005. (Source: Energy Information Administration).
Coal prices so far this year seem to be unaffected by movements in other energy markets. Coal prices may appear to be moving in tandem with natural gas or oil prices one week but be virtually unfazed by their significant fluctuations the next. Powder River Basin coal is trading around $14.00 per ton up 114% from last year but down 15% so far in 2006 due the decline in value of SO2 credits. Central Appalachian coal (NYMEX 1% sulfur) is currently in the low to mid $50s per ton, which is down about 6.5% from last year.
Inventories at utilities remain tight, but unseasonably warm weather in January caused January inventory figures to increase rather than decrease, its seasonal norm. The latest inventory numbers from the DOE are for January at 103 million tons or 36 days of supply. This is 6.3% higher than last year, but 4.6% lower than some analyst estimates of 108 million tons. Analysts estimate utility inventories at the end of February were only 35 days of supply or 103.3 million tons, 5.1% and 3.9% higher, respectively, than February 2005 levels. Historically, coal stockpiles continue to be low: they totaled 106.7 million tons in December 2004 and 121.6 million tons in December 2003 or a 36 and 42 day consumption level respectively.
Looking forward, the current shoulder season, unfortunately, does not give much indication of things to come. The upper Mississippi River and Great Lake shipments have opened for their annual navigation seasons. Rail bottlenecks out of the Powder River Basin in Wyoming continue to have western utilities concerned about deliveries and inventories. It has been widely reported that several western utilities have had to scale back generation due to inconsistent coal deliveries by PRB origin railroads. On the supply side, producers have looked to reopen marginal mines whose higher cost can be offset by better market prices, and several coastal docks are beginning projects to offload foreign coal for shipment to inland power companies. Weather and transportation will be the short term factors affecting coal markets while changes in environmental standards will revise longer term buying habits. In the next issue we will discuss the effects on utilities who, due to mandated regulations, will retrofit boilers with scrubbers allowing them to burn higher sulfur coal beginning in late 2007.
Compass Coal provides coal sourcing, sales and consulting services for industrial and utility customers throughout the eastern United States. Current information on coal prices and inventories can be found through the Compass Energy Web site which has a link to the Department of Energy’s Energy Information Administration data.
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