By Lee Buchsbaum
At a conference held during the middle of last year, the CEO of one of the largest owners of coal reserves in the nation joked that perhaps he should pass out Bowie knives to the audience instead of information, as experts were united in predicting the collapse of the coal industry. Almost a year later at the McCloskey Coal USA conference in June 2010, Greg Boyce, CEO of Peabody Energy, observed worldwide development and demand for electricity has lead to the beginnings of “a 30 year supercycle for global coal markets.” Assuaging last year’s doubts, coal is needed for global steel production, especially in developing Asian countries such as India and China. “More than 3.6 billion people around the world lack adequate access to electricity today. Another 2 billion will require electricity in the next 20 years. In as little as 20 years, the world will need additional electricity for approximately today’s entire global population,” said Boyce.
As summer turns to autumn, U.S. and Canadian coal ports from Prince Rupert, B.C., to Baltimore, Md., are setting unprecedented loading records and almost all of the primary export facilities are operating near capacity. Growing demand for PRB and bituminous coals, combined with increasing tightness in the metallurgical markets, is once again fueling speculation for a new West Coast international coal port. An unexpected benefit from the overall economic downturn has been the easing of rail congestion for coal movement throughout the western network, allowing easier transit for PRB coals. However, Eastern producers continue to gripe about erratic shipments and express concern over congestion at Norfolk Southern’s Lamberts Point Terminal in Newport News, Va., the largest coal port in the U.S.
Domestically, a long hot summer has drawn down stockpiles at power plants nationwide. While the availability of inexpensive natural gas and stringent Obama-inspired EPA regulations have reduced coal’s slice of the power generation pie, utilities are once again returning to a shifting marketplace, as controversial and expensive Central Appalachian coal is replaced with increasingly plentiful Illinois Basin product.
With the new chill in the air, Coal Age looks back on where the industry has come from and what may be ahead.
Hot Summer Draws Down U.S. Utility Stocks
Back in 2008, many utilities worried when a tight coal market emerged. As a result, in 2009 many companies signed longer term contracts to ensure they would have supplies. “When you buy coal, you buy both reliability and value. Reliability was the trump card over the last few years. When the utilities realized they’d over-bought, they ended up re-establishing their stockpiles,” said Daniel Rimstidt, the former head of Cinergy’s Fuel Group and current president of Strategic Energy Resolutions, Inc.
When the economy cooled off, less overall rail traffic allowed smoother coal shipments so much so that utilities began to park unneeded rail sets, as too much coal was flowing too rapidly for them to store. As less electricity was needed and the purchased coal kept showing up, piles grew tall. “The story for 2010 is that we’ve been wearing down those piles. Now folks are starting to think about 2011 and 2012. They are carefully placing those orders and hoping to return to manageable levels, not less than normal, just manageable,” said Rimstidt.
Many of the buyers that were waiting have now re-entered the market. Given flexibility in their boilers, many are testing Illinois Basin coals. “The ILB has become the go-to area when you can’t get CAPP coal, or if you’re looking for something longer term,” said Rimstidt, reflecting the fear that as new CAPP-aimed regulations are piled on the industry by the Obama administration, utilities might get caught in the crossfire. Or worse, caught short of coal. Many of the region’s coal suppliers, assuredly the small ones, can no longer guarantee customers two to four years of supply. With reliability high up on their hierarchy of needs, “utilities are at least testing or trying out Illinois Basin coals,” said Rimstidt.
Ironically enough, the industry went through a similar cycle 20 to 30 years ago when the Clean Air Acts shriveled demand for ILB coals. Many of today’s CAPP users were once ILB users and many of their boilers were originally built to handle the idiosyncrasies of that particular fuel. Given the addition of SO2 and NOx scrubbers, it’s particularly easy for those original ILB-fueled boilers to switch fuels.
Stockpile Draw Downs May Have a Downside
Throughout the first half of 2010 domestic coal production declined by 15.5 million tons over 2009, according to recently released data by the U.S. Mine Safety and Health Administration. The downturn was particularly acute in Central Appalachia where production is down by more than 12 million tons. Most of the rest of the reduced production is from the PRB, which is down by more than 2 million tons through the end of June. Overall, according to the Energy Information Administration (EIA), U.S. coal production decreased 5.2% year-over-year for the 52 weeks which ended September 12.
Reduced electrical demand throughout the Great Recession has allowed utilities nationwide to slowly burn down their once sky-high coal stockpiles. From a peak in November, stockpiles were down to 178 million tons at the end of June. According to EIA data, on August 31, stockpiles had declined to 166 million tons, a 14.3% decline from the 194 million tons held at the end of July 2009. From June to July of this year, inventories were further drawn down 7.9%, with utilities burning 14.2 million tons in a single month, according to the EIA. “The 14.2 million tons draw in July is significantly larger than the 10-year average draw of 8.9 million tons, with the next highest draw in July over the past 10 years coming in 2008 at 10 million tons,” said Doyle Trading Consultants in a recently published report.
While total U.S. electric power generation increased 9.2% in July year-over-year and coal-fired generation increased more than 12%, natural gas-fired generation also increased 11.4%. With rapidly diminishing stockpiles, utilities are now faced with a coal vs. natural gas decision. Armed with greater buying flexibility due to the installation of scrubbers, steam coal buyers are increasingly settling on less expensive and more plentiful Illinois Basin coals going forward—especially as more and more NAPP coal goes into the PCI or “cross-over” market.
Asian Demand Drives Record Exports
From nearly all regions and coal basins, America is exporting vast amounts of coal at a pace nearly equivalent to that of the robust 2008 market. During the boom before the Great Recession, eastern coal producers were already seeing escalating demand for metallurgical coal. Today, China and India have become dominant consumers, but are also rapidly turning to U.S. producers for thermal coals as well. Together, they are rapidly changing both the market and the strategies in place to serve it.
In a recent earnings report, Alpha Natural Resources said China’s electricity consumption rose more than 21% in the first half of 2010, much of it fueled by seaborne thermal coal. June imports were on an annualized pace of 97 million tons, up from an annual pace of 76 million tons in May. India, while far behind China, is also rapidly growing as an export destination. Alpha now forecasts a 10% increase in Indian imports annually toward a height of 100 million tons by the middle of the decade. “This rapid Asian demand growth for seaborne thermal coal is straining the export capacity of Indonesia and Australia, which together account for approximately 50% of the world’s seaborne thermal supply,” Alpha said. “To keep up with growing Asian demand, South African and Colombian coals that traditionally served the European market are increasingly moving into the Asian market, which should create an opportunity for U.S. exports into the Atlantic Basin in the near future.”
Despite a stalled economy in the U.S. and Europe, and taking into account a slight dip in the frenetic growth of China’s economy, China remains on track to produce between 620- to 630-million tons of steel, up 10% from 570 million tons in 2009. Chinese met coal imports have risen from almost zero in 2008 to 34 million tons in 2009, and China is on pace to import more than 40 million tons in 2010. “While internal met coal resources can be developed and imports from Mongolia can be increased over time, China is likely to remain dependent on seaborne imports of high quality metallurgical coal for the foreseeable future,” Alpha said. “As with thermal coal, India may offer the more persistent long-term growth opportunity for seaborne metallurgical coals due to the absence of quality domestic reserves.” Indian imports totaled 28 million tons in 2009 but are projected to ramp steadily, nearing 50 million tons by 2015. In this environment of growing metallurgical coal demand and limited sources of supply globally, prices have tested near-record levels.”
With new markets have come new opportunities. CONSOL Energy, while continuing to supply some of the best low-vol metallurgical coal in the market from its Buchanan mine in southwestern Virginia, has partnered with Xcoal Energy & Resources, the Pennsylvania-based coal marketer headed by Ernie Thrasher, to market Pittsburgh No. 8 coal into the met market. Arch Coal recently estimated U.S. coal exports in the first half of 2010 had reached about 39 million tons, an increase of 45% compared to the first six months of 2009. The strong 2010 export pace is on par with the strong 2008 level. For the full year, Arch expects domestic coal exports to total 75 million tons to 80 million tons, representing an increase of 15 million tons to 20 million tons compared to 2009.
During a Norfolk Southern analyst presentation in late July, Chief Marketing Officer Dan Seale said the railroad’s total coal volume was up 19% in the year’s second quarter led by gains in export coal which grew by 39,000 loads—or 177%, exceeding the 28% increase in global steel production. “Domestic met coal volumes were up 31,000 loads, or 125%, in the quarter,” said Seale.
After a very strong first half of the year buoyed by the Obama stimulus, met demand slowed moderately throughout the recently concluded third quarter. But looking ahead, Thrasher predicted the year will finish with a very strong fourth led, of course, by Chinese demand. After a slight slowdown from late May through early August, “we continue to see a full shipping schedule to our Chinese customers,” said Thrasher.
In a novel method of maximizing every bit of shipping capacity, Thrasher has found a way to cut up to $20 per ton off the ocean freight cost of coking coal exports out of the U.S. East Coast to Asia. In a speech at the June Coal USA 2010 conference, Thrasher said U.S. port facilities at Baltimore and Hampton Roads, Va., have draft restrictions that prevent the handling of completely loaded Cape-size ocean-going vessels, many ships moving through these ports are only able to load at 60% to 70% of capacity. To fill up some of that otherwise wasted 30%, Xcoal moves its ships up to Nova Scotia, where a self-unloading vessel sails out to a protected area in the Atlantic Ocean and tops off each ship.
“We’re double loading roughly two ships per month now,” Thrasher said. “The system is working remarkably well, better than we thought it would.” With a few loadings under its belt, Xcoal has reduced loading times from 40 hours to now just over 24 hours to full load. “We have two loadings scheduled for September and three for October, each headed to Asia. We’ve had more demand for this operation than we have vessels,” he said.
Sustained worldwide met coal demand is driving renewed expansion plans for fortunate met coal producers nationwide. Despite the challenges they face in Central Appalachia, Massey Energy, CONSOL, Patriot, Cliffs Natural Resources, Alpha, Arch and ICG have all been expanding their met production capabilities in an effort to ride the hot ticket. In an earnings release, ICG President and CEO Ben Hatfield said second quarter earnings “were driven primarily by our moves to sell more metallurgical tons with higher pricing and our continued focus on effective cost control.”
In an interesting acquisition move timed to the booming met market, Cliffs Natural Resources closed its previously announced acquisition of privately held INR Energy LLC, on August 2 for $757 million. Based in Richmond, Va., INR owns two active met coal mines and an operating steam coal mine.
In its announcement, Cliffs said it plans “to sharply increase the production of met coal out of INR’s operations, growing it to 2.4 million tons per year by 2012.” If successful, Cliffs will be producing more than 8 million tons of met coal worldwide by 2012.
On the West Coast, coal tonnage shipped through the Westshore Coal Terminal in Vancouver, B.C.—the largest Pacific coast coal port—increased in the second quarter, though it fell in the third. Westshore shipped 6.1 million tons of coal in the second quarter, compared to 5.1 million tons during the same period of 2009. Mid-year, Westshore had anticipated total throughput volumes for 2010 could be in excess of its previous 23.5 million tons record set in 1997. However, recently Teck Resources Ltd., Canada’s largest met producer, cut its coal-sales forecast because of capacity constraints at Westshore (See World News, p. 5)
Canada’s second largest met exporter, Western Coal, continues to expand production from mines in northeastern British Columbia, even as Chinese demand fluctuates. “Steel production is expected to rebound during Q4 2011, particularly in Asia, resulting in a strengthening in metallurgical coal demand toward the end of the fiscal year. World seaborne metallurgical coal demand is forecast to be approximately 270 million tons in calendar year 2010. China imported a record volume of coking coal of 18.7 million tons during the five months ending May 2010 and is forecast to import approximately 40 million tons in calendar 2010,” said Keith Calder, president and CEO, Western Coal. “India is also expected to import 36 million tons of metallurgical coal during the 2010 calendar year while Brazil is forecast to import 16 million tons.”
Way ahead of all other western U.S. coal producers in exporting PRB coal, Cloud Peak Energy shipped 760,000 tons of PRB coal from its Spring Creek mine into the export market during the second quarter, increasing its total export shipments during the first half of the year to 1.5 million tons. “We continue to see future export demand and prices strengthen and expect the second half of the year to be even stronger,” the company said. “Export volumes are now anticipated to exceed 3 million tons this year.” That would nearly double the company’s exports in 2009, when it shipped 1.6 million tons abroad.
The increasing port bottlenecking for exports off the west coast continues to propel several major producers to pursue a new Pacific port. Though its just announced its first ever shipment of PRB coal to the UK, Peabody Energy has said in various investor presentations it hopes to announce a West Coast terminal by year’s end. Speculation continues to swarm around existing facilities along the Columbia River west of Portland.
According to a variety of newspaper reports, Ambre Energy, an Australian coal company, is exploring mining acquisitions in the basin and the purchase of the 416-acre Chinook Ventures port site in Longview, Wash., for a bulk export terminal. However, despite the much needed jobs, tax revenues and importance of reducing the overall trade imbalance, various environmental groups in Oregon and Washington are crying foul and taking steps to prevent these opportunities from developing.
Buchsbaum is a Denver-based freelance writer and photographer specializing in industrial subjects. He can be reached through his Web site at www.lmbphotography.com or by phone at 303-746-8172.