Domestically, with large volumes of cheap natural gas coming on-line as increasingly stringent and costly regulations are being levied upon the coal industry, coal operators are getting squeezed.

One of the few growth areas for the industry at the moment might come from a robust and expanding export business. Even though it only represents a fraction of overall production, exporting to coal-friendly nations is perhaps the most viable way the industry can grow with declining domestic markets on the horizon. Further propelling exports are the massive floods that have hit Australia as production problems continue to dog other nations. Supply instability has proven to coal importing nations the need to maintain a variety of viable sources.

As a result, rapidly expanding Asian economies in China, India, Korea and Taiwan are being joined by Brazil and traditional Japanese met coal buyers in crowding capacity at existing east and Gulf coast terminals. Indian, Asian and European buyers are also taking more Illinois Basin steam coal. Producers and shippers are responding by expanding capacity at existing ports, and where available, opening up new options.

The Regulatory Train Wreck

Michael Peelish, Alpha Natural Resources executive vice president and chief sustainability officer, began his presentation by evaluating the success of the 111th Congress at passing new climate-change based regulations. The most significant proposed legislation, the Waxman-Markey bill, narrowly passed the House in June 2009 by a vote of 219 to 212. However, no climate bill actually reached the Senate floor for a vote during the session. Congress is considering dozens of new rules Peelish terms a legislative “train wreck.” At the end of the day, “the EPA did not have to choose the route they chose.” Obama’s EPA has promulgated 69 new regulations associated with the Clean Air Act and other issues, 28 of which directly impact coal mining or coal-fired electricity generation facilities.

Though the elections overall should begin to slow the momentum on the prevailing anti-coal bias in Washington. “The Republican controlled house will be active in rolling back anti-coal legislation, but most of their efforts will only lead to Congressional gridlock,” Peelish said. In the few weeks since the new 112th Congress has been sworn in, it has are already begun drafting legislation to rein in some of the powers of the EPA. However, “the vacuum of uncertainty for utilities and other exogenous pressures make the U.S. a considerably less attractive coal market, while the overseas export markets continue to be more attractive,” said Peelish.

Peelish ended his presentation with three predictions. Because of the huge costs involved, “Democrats will think twice before they cast a vote” on climate change legislation particularly as low income ratepayers and minorities will, according to several sources, be forced to “bear a disproportionate burden when it come to energy costs.” Secondly, “green groups will change their tactics and begin to wage smaller battles on the statehouse level” to influence legislation and permitting locally.

Finally, “the clean energy discussion will start to revolve around technological innovation rather than climate change combined with a direct, but limited, government role,” said Peelish. In fact President Obama’s recent State of the Union address called for increased investments in energy, science and education, and the creation of a series of innovation centers to help incubate and develop new technologies. Coincidentally, it also called for an increase in exports.

While legislation aimed at preventing climate change is off base, worse still, according to Fred Palmer, senior vice president of government relations with Peabody Energy, is a growing dependence on natural gas for electrical generation. Historically, its price volatility has fluctuated almost as much, if not more, than the price of oil. The U.S. has more than 45,000 more megawatts of planned natural gas generation as the nation is being pushed into more gas usage. And of course, wind must have a natural gas backup. “Climate legislation would mean more natural gas consumption, and EPA regulations could lead to another 35% increase in natural gas being used for generation,” said Palmer.

According to his research, high priced gas causes manufacturing costs to rise, resulting in further job losses. “Where is the price of gas going? Xcel Energy’s own forecast for fuel prices in Colorado calls for a 400% increase in fuel prices in the state by 2046. Prices are scheduled to double in the next decade alone. This is something we should be concerned about if low cost electricity is the backbone of competative manufacturing costs,” Palmer said.

While he conceded natural gas is a better fuel than coal in

terms of carbon emissions, however, on a plant lifecycle basis, in terms of emissions profile, natural gas approaches coal. “Scientists in the EPA confirmed this in mid-January. The EPA started to back off from this when it was revealed to the press. But Jim Rogers, Duke CEO said “the problem is, you build a gas plant for 40 years. That’s a long bridge. What if, with new revelations around methane emissions, it turns out to be only a 10% or 20% reduction of carbon from coal? If that’s true…gas is not the panacea” the industry has been sold.

Duke and other large fuel buyers may be looking increasingly to China, where they are mining 3.5 billion tons of coal annually, to develop technological innovations necessary to increase markets for coal while safeguarding the environment. “In China, industrial gas is part of the usage of their coal. They use coal like we use oil by gasifying coal into industrial gas, pipeline syn-gas, chemicals, ethanol, methanol, diesels, jet fuel and other products,” said Palmer.

Echoing a recent Atlantic Monthly cover story, as the Chinese economy advances, so will its level of research into new technologies. This progressive march is key to coal’s future. “In 1970, there were 113 gw of coal capacity in the U.S., roughly one-third of what is available today, said Palmer. “At the time, none of the following technologies were required or deployed: low NOx burners, SCRs for NOx, SO2 scrubbers and other pollution controls.” In the 40 years since, cleaner coal technologies have been adapted and adopted allowing coal to be the basis of the low cost electricity that remains fundamental to the U.S. economy.

East Coast Exports: Using 2010 as a Window to the Future

High quality metallurgical coal, though less than 10% of total U.S. production, has become the most profitable segment for any coal company able sell into the growing seaborne exports market. The majority of metallurgical coal exports from the U.S. east coast originated from three sources in 2010: Massey Energy at 3.76 million metric tons (mt), Alpha Natural Resources at 7.15 million mt, and Xcoal which moved 9.66 million mt, much of it produced by CONSOL Energy.

Ernie Thrasher, Xcoal’s CEO, spoke of the continued opportunities for U.S. metallurgical, cross-over and steam coal into seaborne markets. “The challenge now for U.S. origin coal is to ensure a sustainable, efficient and competitive supply chain to customers in Asia. Four of the top 10 export destinations for U.S. origin coal during FY2010 are located in Asia compared to only one in FY2009. The U.S. is no longer a swing supplier of metallurgical coal. We are now a baseload supplier to several regions around the world.”

In recent years, repeated weather and production problems have plagued Australia, Indonesia, South Africa and Colombia—roiling metallurgical markets as millions of tons scheduled for production were shut in. Currently Australia, the world’s largest met coal producer, is slogging through its wettest spring since 1900, perhaps ever, causing force majeure declarations and wiping out production across the board as pits are flooded and railroad lines washed away.

“Markets are now so sensitive, the anxieties are so high, every bit of news has an exponential reaction to what has happened,” Thrasher said. Based on current market conditions, and with demand continuing to rise, Thrasher expects the April-June benchmark price for premium grades of Australian hard coking coal to settle at a benchmark price in the U.S. of $300/mt to 320/mt by April 1. “We’ll really see it in late March. The price may get adjusted for higher vs. low sulfur, but that’s the price we see coming,” Thrasher said.

Thrasher has raised that benchmark price since the Coaltrans conference. “Xcoal remains very bullish on coking coal fundamentals and commented that it sees the Q2 coking coal contract to be settled near $325/mt to $330/mt,” said Curt Woodworth, coal industry analyst for Macquarie.

In 2010, Asian demand for U.S. metallurgical coal surged. Chinese imports increased 290% over 2009’s numbers, skyrocketing from less than 1 million mt to about 3.8 million mt. Up 450% were Japan’s imports: 500,000 mt to about 2.9 million mt. Korea posted a 93% increase from 1.3 million mt to about 2.7 million mt. India, which is also purchasing increasing amounts of U.S. origin steam coal, took 28% more met coal, increasing from 1.8 million mt to 2.3 million mt. In total, coal volumes to Asian nations increased more than 250% from the year before.

Even exports to Europe are increasing, most notably to the Ukraine which took nearly 10 times more coal in 2010, going from less than 250,000 mt to 2.4 million mt. Overall, only two of the top 10 import destinations saw decreases, France and the Netherlands, which were down 21% and 50% respectively—largely due to a slower recovery in Europe.

Steel production rates continue to climb worldwide. Global leader China, after a leveling out last year, has ramped back up toward an annualized production rate of 654 million mt, according to Thrasher. Even U.S. steel producers are starting to ramp up from the 90 mt of steel last year. As the U.S. economy recovers “domestic steel producers are going to have to come back to the market to top off their coal requirements,” he said.

Thrasher believes total demand from Asian customers in 2011 will increase to more than 20 million mt in 2011. “Approximately 70% higher than 2010,” Thrasher said. Overall his forecast for FY 2011 calls for Japan to take 7.8 million mt; China, 5 million mt; Korea, 3.5million mt; and India, 3.5 million mt. Thrasher also forecasts Taiwan will take almost 500,000 mt for its steel industry.

One of the challenges of moving U.S. produced coal to Asia is how it can be competitively delivered. Xcoal and CONSOL Energy in cooperation with Canadian International Steamship lines reintroduced a loading process first initiated in 1981. Basically a Capesize vessel of 180,000 dead weight tons (DWT)-210,000 DWT meets up with a smaller, belted self-unloading vessel ship loaded at between 55,000 DWT-75,000 DWT off the coast of Nova Scotia. There the smaller vessel transfers its cargo to the larger Capesize. “While the process adds approximately four days to the normal 48 day journey, when the vessel leaves Canadian waters, it has 40% more cargo. The customers realize the benefit of lower cost ocean freight, which reduces the overall delivered cost,” said Thrasher.

In 2010, Xcoal did two top-off vessels a month. “With the help of CSL, we’ve charted enough vessels to do 50 to 55 top offs this year, one a week. That’s what’s necessary to hit a 20 million mt level,” said Thrasher. Xcoal is currently moving significant quantities of Pittsburgh No. 8 seam coal as coking coal out of CONSOL Energy’s CNX terminal in Baltimore and other ports. “We’re doing three Capesize vessels a month, that’s 400,000 tons a month to Asia. And that could double,” he said.

What’s the Ceiling for U.S. Exports?

David Host, president and CEO, T. Parker Host, the main stevedoring company on the East Coast, serves all of the coal ports in Baltimore and Hampton Roads, including both CONSOL Energy’s CNX and Norfolk Southern’s Lambert’s Point facilities. As the third generation Host to helm the company dating back to its foundation in 1923, David comes armed with a longitudinal perspective.

While impressive volumes of both met and steam coal are now moving to China, which recently surpassed Japan as the world’s second largest economy, Host reminded the audience that Brazil, which imported more than 5 million mt from all East Coast ports combined, was the single largest destination. Behind it followed a variety of European and Asian importers. Host pegged total east coast exports at 46.5 million mt. Of that, Asian exports made up roughly one-fourth or 11.8 million mt.

Combined with the ports of Mobile and New Orleans, total U.S. eastern exports exceeded 65 million mt (Host noted incomplete data might change Gulf figures, see chart). Of the 65 million mt, almost 80% or 51.7 million mt was seaborne metallurgical.

The 18.6 million mt from the Gulf exceeded 2008’s record number, and was up from 11 million mt from 2009. Early figures suggest 2010 just barely exceeded 2008’s total record export totals of 64.7 million mt. However, year over year, exports were 30% higher than 2009’s 46 million mt overall.

What almost everyone at Coaltrans agreed upon was the export market was going to continue to grow, constrained really only by off-take logistics: production capacity, rail capacity, port capacity and, potentially, seaborne vessel capacities and availabilities. Buyers are available, it would seem, cash in hand. As increasing met and steam volumes move into the marketplace, Host questioned how much existing port capacity would actually be available, especially given name-plate capacities can often be misleading and ports are already running flat out.

The rated capacity for the top nine east coast coal ports comes to 152 million mt, Host recalculated the actual figure, taking into consideration coastwise tonnage, “at more like 110 million mt overall,” Host said. Drilling deeper into the data, and focusing only on the five major Baltimore and Hampton Roads ports, Host evaluated that last year’s export volumes used up only 72% of real capacity, 53.3 million mt out of a best-case potential of 73.84 million mt. In an attempt to evaluate approximate real capacities, Host took each terminal’s best month’s figures, as measured by through-put in 2010 and multiplied that figure by 12.

By his estimates, Host believes there to be roughly 20.5 million mt of existing capacity out there, given the best case scenario for each of the five major ports. Using the same data sets, Host also said there was another 11.9 million mt or 37% more capacity available out of Gulf ports. Combined, Host calculates there could be as much as 32.4 million mt of available capacity remaining for 2011.

While Host estimates on the high side that 2011 could have a 16 to 18 million mt increase in exports over 2010, he’s a little more conservative. “We’ll likely see more of a 12.5% increase, maybe another 8 million mt for a total of 73 million mt tons.” Host further broke down his predication to approximately 58 million mt of metallurgical and 15 million mt of steam coal.

Of course, it’s unwise to assume that each port will be able to operate at capacity throughout the year as breakdowns and other force majeure situations will no doubt occur somewhere—in fact, though not included in Host’s tabulations, New Orleans’ IMT facility has already experienced some setbacks this year. Further complicating the situation is that as of January “most terminals were already working at capacity, and were able to ship at or near record levels.” The more stress put on the system, the more chance something will go wrong.

As the end of the supply chain, port throughput capacity is only one factor in how much coal can be loaded into the seaborne market. First and foremost, the coal has to arrive at the port—and that is up to the industry’s railroad partners. “I think they did a good job with the assets they had to work with in 2010,” Host said. “CSX reported that they shipped 30.4 million mt into the export market. NS shipped approximately 23.6 million mt. Why didn’t they load more? The problem lies in the west,” said Host.

With rail fleets down following the Great Recession, NS only has about 4,000 coal hopper cars in dedicated export service. Given that most Capesize vessels hold about 1,000 railcars’ worth of coal, lack of cars accounts for some of the existing delays and curtails capacity. “We’ve all heard about cues at Hampton Roads. One of the delays is that you’ve got to load four ships to empty the existing amount of dedicated coal hopper cars. Then you have to get them back to the mine, get them loaded and ship the cars back to the port for them to fill the hulls of the next four ships that are already waiting. That’s a little tight,” said Host. Notably, by the end of February, NS announced it was purchasing 1,500 new coal cars for dedicated export service.

Additionally, NS, which owns Lambert’s Point, will also staff up so that it’ll be able to operate two loaders at the facility by later this year. CSX additionally is bringing back into service stored rail cars and both railroads are investing heavily in new locomotives and increasing employment as well as other capital expenditures. “While they’re definitely on the right track, we won’t see these improvements until the third or fourth quarters of 2011,” said Host.

With existing port capacity being squeezed, Host reviewed a few remaining transit options for limited or incremental shipments. “Kinder Morgan’s Fairless Hills, Pa., facility near Philadelphia is dual rail served, and might be able to load possibly up to 2 million mt from Panamax ships. Kinder’s Pier IX in Hampton Roads was upgraded in 2010 which increased their capacity another 2 million mt. NS’ decision to open up the second side of Lambert’s point might enable them to get to 22-24 million mt. That’s more realistic than the 30 million mt NS quoted as possible,” said Host.

A favorite option of Host’s, however, is re-opening the long gone former C&O Railway Piers 14 and 15, which are adjacent to the existing DTA terminal in Hampton Roads. “Its 47 acres and is owned and served by CSX. It was a coal export facility for over a hundred years, so permitting should be easier. Engineering studies in the 1990s showed a “Cadillac” model facility that for in excess of $150 million would be able to add 13 million mt of capacity out of Hampton Roads,” Host said.

Brett Harvey, CONSOL Energy’s CEO concentrated his presentation on how the company is increasing markets for its Northern Appalachian coal by growing its export options out of its wholly-owned CNX port in Baltimore. Looking to begin expansion this year, CONSOL plans to grow from 12 million mt of actual capacity to 18 mt over time. “This is a reflection of how much demand for coal exists and is coming out of China, Korea and other developing markets,” said Harvey. “We have more acreage than we are currently using. Expansion for us is more a function of adding additional rail and ship capacity. That’s two different projects. We’ll probably address the unloading of trains first by double tracking the facility and then work on how to better load ships.” While acknowledging that permitting is always a hurdle, Harvey feels whatever objections come to light won’t “be insurmountable.”

Similarly, Mike Beyer, CEO of Foresight in his presentation repeated how the company has almost reluctantly embraced a robust export market. Foresight started to export coal to Europe three years ago and has recently begun shipping in large volumes to India. Though its true that as more and more met coal is being exported from the U.S., less existing capacity will be available, “there is some remaining capacity expansion available through the Gulf and elsewhere. We ship through CN’s Marine Terminal and IMT, all of those ports have the ability to expand. With the right commitments, we can expand on our relationships in volume, length and term,” said Beyer.

Jamie Heller, president of Hellerworx, Inc., in his presentation discussed how historically rapid shifts in coal shipments to the export market have often resulted in congestion system-wide. While exports are exciting, the vast majority of production is for the domestic utility markets. “Coal in the U.S. has historically been a utility business, and is mainly for domestic consumption. That’s a very different model from Canada and Australia. However, that business’ growth prospects have been trimmed substantially in the last few years,” he said.

Overall, CSX is expecting a major increase in coal export traffic. Coal revenue increases last year were 26%. Published CSX tariff rates were increased 70%-80%, effectively doubling the rates on export coal. NS has also exercised its pricing power and increased rates through the recession period. The railroads have recognized they too can benefit from market and demand shifts, and they can adjust their rates accordingly,” said Heller.

However, if the booming export market is really just a bubble, “then the railroads shouldn’t build for it. There is no doubt the whole export shipment process is full of holes that won’t be readily patched. But the truth is producers, traders, railroads and their customers all benefit from the congestion and turmoil as they create other opportunities,” said Heller.

Buchsbaum is a Denver-based freelance writer and photographer specializing in industrial subjects. He can be reached through his Web site at or by phone at 303-746-8172.