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Coal Outlook Confused by Increased Global Demand, Lower Prices and Regulatory Changes
October 2006
Mild weather and improved transportation, coupled with increased production driven by higher prices, have allowed utility power producers and others to replenish coal inventories throughout the first half of 2006 and prices have now retreated from their highs of late 2005. The relatively mild weather experienced during 2005 and the winter of 2006 has helped utilities rebuild inventories and mild weather has also helped alleviate production and transportation problems experienced both east and west. High market prices over the past several years have encouraged mining companies to expand production and, as a result, NYMEX coal has traded lower from the mid $50s this past spring, to about $47 in early August. Though only about 20% of coal produced in the US is traded on NYMEX and OTC markets, this downward trend clearly illustrates that the low sulfur steam coal market has retreated from last year’s highs near $60 per ton.
Although coal’s near term value may have weakened compared to a year ago, coal prices remain close to double what they were 5 years ago. In spite of that long term increase in price, global coal usage has grown 23%, or about 1 billion tons, since 2001. (The other way to look at this, of course, is that the global increase in demand for coal has been the driver for increasing prices.) This compares to a 12% growth in the usage of natural gas and 8% and 4% for oil and nuclear power respectively. Going forward, coal will benefit from the development of clean coal technologies, coal gasification and liquefaction, as well as new markets such as ethanol production.
The most watched development in the coal industry over the next several years will be the effects that the new Clean Air Interstate Rule (CAIR [http://www.epa.gov/cair/]) will have on traditional coal sourcing within this nation’s utility industry, mostly located east of the Mississippi River. Phase I of CAIR comes into effect in 2010 for SO2. Phase II takes effect in 2015. States and their respective power producers can achieve the required emissions reductions by using one of two compliance options: meet the State’s emissions budget by requiring power plants to participate in an EPA-administered interstate cap and trade system that caps emissions in two stages; or meet an individual State emissions budget through measures of the State’s choosing. Consequently, power companies are projected to add flue gas desulfurization equipment (scrubbers) to 141 gigawatts of capacity in order to comply with State or Federal initiatives (source: EPA/EIA).
While power companies have, in the near term, increased their use of ultra low sulfur coal from Wyoming’s Powder River Basin, the installation of scrubbers will allow them to source supplies of coal closer to home, i.e., Illinois Basin and Northern Appalachia. The main impact of widespread installation of scrubbers on coal markets is that quality differences among the coal producing basins will have a lesser influence on buying decisions. Rather, the lowest cost coal, on a BTU basis, delivered to individual plants will win the business.
To prepare for this further commoditization of coal, power companies are not only investing in scrubbers but are also working with transportation companies to fix freight rates from non-traditional sources. They are also preparing to blend a variety of coals at power stations in order to lower their average delivered costs. Coal users in the Carolinas, for example, who have traditionally depended on low sulfur coal from central Appalachia, are now sourcing coal supplies from South America as well as the Midwest and western coal producing regions. Other large coal buyers are taking a similar approach and the US, with huge coal reserves nationwide, is beginning to see an increase in imported coal. How this will all play out over the long term remains to be seen.
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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