BY Steve Fiscor, Editor-in-Chief

The coal industry will gladly join the rest of the world in saying good riddance to 2009. It was a tough year for the coal business, but other sectors, such as construction, financial, automotive, real estate, etc., faired much worse. As can be seen from the Top 10 Producer Chart, total U.S. coal production was down nearly 8% in 2009. Everything is relative and many sectors reported declines in business as great as 20% and 30%. As the economic recovery takes hold at home and abroad, prospects for 2010 and beyond improve.
Every January, the Coal Age Annual Forecast gives an assessment of the current market situation, as well as the state of mind among coal operators, and takes a huge chance, predicting what the future holds. After nailing it for several years in a row, last year’s prediction was pretty far off the mark. The 2009
Annual Forecast predicted a 2.3% decline in U.S. coal production, or a 27-million-tons decrease, which seemed large at the time considering the consistent previous levels of year-on-year growth. Production actually dropped more than 90 million tons in 2009. No one really had a feel for the severity of the economic downturn and its impact on power consumption was underestimated. The important statistic to remember, however, is that the U.S. still mined more than 1 billion tons of coal.
Setting supply-demand fundamentals aside for moment, the survey also asked coal operators about their feelings, the amount of money they plan to spend this year and how they intend to spend it. The survey also asked them to rank issues affecting the industry. A similar open-ended question, designed to identify possible overlooked issues, elicited an overwhelmingly similar set of responses that varied from “lying Democrats” to the “Obama Administration.” To say the new president and the political left are not popular in coal country would be an understatement. While the short-term mood of the respondents was dark, long-term they remain optimistic.
As far as the coal industry is concerned, 2009 will probably best be labeled as the year of massive demand destruction. Coal operators learned firsthand how power demand is inextricably linked to the economy. Overall demand for power dropped 4% last year. Coal-fired generation, however, dropped 10%, which is a record decline for at least the last 30 years. As if declining demand was not bad enough, gas prices last summer dropped to levels that allowed it to compete with coal for market share as a fuel source. Similarly, coal stockpiles at electric utilities approached historic highs and spot coal prices returned to levels that seem more familiar. By the third quarter of 2009, many coal company CEOs found themselves in the same position as a football coach telling reporters that the team’s entering a rebuilding phase after a losing season.
It’s not all doom and gloom though. The new year opened with most of the country in a prolonged deep freeze, which pushed natural gas prices higher (>$6/mmBtu) and helped draw down utility stocks. Many economists believe that the U.S. has entered the early stages of an economic recovery and they expect 2% to 3% growth in GDP during 2010. The demand for steel is improving in the U.S. and abroad. Chinese imports are keeping seaborne thermal markets buoyant. Regulatory issues, both environmental and safety, will constrain production, especially in the East.
Long-term the prospects for the coal business look good. Some coal producing regions will gain at the expense of others while overall demand increases. In a presentation at the 2009 FBR Capital Markets conference held during December in New York City, Rick Navarre, president, Peabody Energy, explained that as many as 29 coal-fired units in the U.S. are under construction and will require an additional 65 to 70 million tpy. And he thought production from the Powder River Basin (PRB) and Illinois Basin (IB) would serve more than 80% of U.S. demand growth through 2013. During the next four years, Navarre expects PRB and IB production to grow by as much as 60 and 30 million tons respectively, while Central Appalachian (CAPP) production declines by as much as 40 million tons.
CAPP production has some challenges, including unfavorable geology, regulatory issues, railroad performance, litigation from environmental activists, etc. Permits for future surface coal mining jobs, mountaintop mining in particular, remain in jeopardy, but that represents only a slice of CAPP production. Massey Energy CEO Don Blankenship is quick to remind the market of West Virginia’s key advantages, which include a high-quality product and a close proximity to power plants and export markets, and he warns people not to write off CAPP production so quickly.
West Virginia was hit hardest by the market downturn. Total 2009 U.S. coal production actually dropped 91 million tons to 1,080 million from 1,171 million in 2008. Production in West Virginia fell below 150 million tons for the first time in at least 20 years. The Mountain State mined 139 million tons, down 11% (17 million tons). Pennsylvania suffered the second largest percentage drop (10.7%), followed by Wyoming (8.6%). Wyoming coal production on a tonnage basis remained the highest at more than 421 million, amounting to more than the combined production of West Virginia, Kentucky, Pennsylvania, Montana, Indiana, and Texas. On a delivered Btu basis, it would be a different story.
American factories run on electricity and demand for coal disappeared along with the jobs. As of September 2009 (latest stats available from the Energy Information Administration), utility coal consumption stood at 701 million tons, compared to 792 million tons at the same time in 2008. That would have been just prior to the economic collapse. Total coal consumption for 2008 amounted to 1,044 million tons. Giving an optimistic level of consumption for October through December 2009 of 80 million tons per month (a total of 240 million tons), final 2009 utility coal consumption might amount to 941 million tons. In a best case scenario coal demand dropped around 100 million tons.
Weak demand leads to high stocks and U.S. stockpiles had reached 199,864,000 tons by the end of September (latest stats available from EIA). That is very close to a new 200-million-ton threshold—one that the industry has not seen since 1980. Last year, stocks as high as 150 and 160 million tons had the industry worried. Utility stockpile remained at those levels until January 2009 and then they quickly climbed to the 190 million ton level and remained.
High stockpiles give the utilities bargaining power and that means lower spot prices for coal. At the end of 2008, coal markets experienced a huge run-up in prices that hinged on activity in the met markets. Once the world’s steel mill shut down, spot prices for coal fell. On a year-on-year basis, the price swing seems dramatic. In reality, spot prices, with the exception of PRB coal, have settled at levels equal to or better than 2007. As an example (See Figure 3), December 2009 spot prices for Northern Appalachian (NAPP) coal dropped to $52.50/ton from $101.50/ ton. In 2007, NAPP was selling for $55.25/ton. PRB spot prices retraced its tracks to 2006 levels.
Even though domestic coal consumption is expected to increase 5% to 7%, high stocks will dampen the 2010 recovery. It will take some time for the utilities to burn off that excess capacity. Many coal operators see the markets returning to normal sometime in the third quarter of 2010. Coal production will remain steady. With more CAPP tons disappearing and met markets improving, coal operators could see spot prices firm again in 2010. CONSOL Energy CEO Brett Harvey describes 2010 as a bridge year with some potential in the metallurgical markets.

This Year Will be Better than Last Year, But…
Coal Age contacted 1,500 readers and received 171 completed surveys. The demographics largely resemble the U.S. coal industry. The majority of them (79%) produced bituminous coal. Sub-bituminous, lignite, and anthracite accounted fro 12%, 8%, and 1% respectively. As far as production capacity, the respondents were evenly divided among small (less than 1 million tons, 32.7%), medium (1-5 million tons, 28%), and large (greater than 5 million tons, 39.1%). A total of 61 respondents (36%) claimed that they mined coal underground exclusively, while 50 (29%) said they only operated surface mines. The remainder (60 or 35%) said that they worked for company that mined coal using both surface and underground techniques. The respondents said that most of their coal production went to electric utilities (71%) and some went to industrial users (12%) and steel mills (17%).
Of the executives surveyed, 38% thought that coal production would increase in 2010, while 33% felt production would drop and 29% said production would remain the same. Last year, 17% of the respondents thought 2009 coal production would decrease. Looking ahead to 2011, a majority of the respondents (47%) thought production would increase and only 16% foresee a decrease.
The question regarding productive capacity yielded a similar response (See Figure 5). More than two thirds of the respondents (68%) thought their mines would run at less than 90%. That figure has grown consistently for the last five years from 21% in 2006 to 43% in 2008. Although the group is not as great as last year (63%), more of the respondents were pessimistic about the prospects for 2010 (42.6%) rather than optimistic (33.9%). If pessimism drops from 63% to 42.6%, can we call that an improvement? Probably not, because 23.3% said that their feelings had not changed from 2009.
Coal mining is expensive. As far capital budgets, the responses were spread fairly evenly through the spectrum. While 30% said they would spend less than $1 million, 45% said they would spend more than $10 million and 23% were planning to spend more than $50 million. About one third (35%) of them said the capital budget for 2010 had increased, while 29% said it had decreased. A surprising amount of respondents (9%) were still not sure what their 2010 capital budget would be. When asked how they would spend the money, they said new equipment (66%), equipment upgrades (57%), and mine development (53%). Those numbers are not significantly different from last year, but new mine start-ups fell to 26% from 31%. That number was 44% two years ago.
The survey also asked about the single most expensive item the mine planned to purchase in 2010. The answers (See Figure 6) $220 million for a dragline to $150,000 for a underground miner tracking system. Nine respondents said they planned to build a new prep plant. Five respondents were planning to rebuild continuous miners while 11 were going to purchase new ones. When asked how their money would be allocated on a percentage basis, the readers said that 30% of their money would be spent on new equipment and only 18% would be spent on equipment rebuilds (See Figure 9).
Coal operators expressed a lot of frustration in the survey. As an example, one reader wrote, “Continuing pressure by federal agencies on the mining and generation industries is crippling our industry. If this administration has its way, there would be no coal mined or burned in our country.” Another wrote, “We have voted in an administration that is anti-coal and is trying everything possible to stamp out mining, by regulation and enforcement.”
When asked about what specific issues will affect the coal industry the most in 2010, the overwhelming response was politics, followed by the economy and prices. Until this year, prices had been the leading indicator for the past several years. They thought that limited capacity would affect the industry the least.
Looking forward to 2010, it’s safe that total U.S. production will either stay the same or show a minor level of improvement. The Energy Information Administration said that it expects electric power generation to increase by 1.9% in 2010, which would be driven primarily by the residential and commercial sectors. Reading between the lines, the growth would come from quality of life improvements not new manufacturing demand. As long as the jobless rate remains high, power demand in the U.S. will remain relatively flat. Considering the high levels of stockpiled coal at electric utilities, coal consumption will remain flat. Should the economy improve and, if global demand has a similar influence on U.S. markets, as it did at the end of 2008, then the U.S. coal market could see some improvement. Most analysts believe that this best case scenario would play out in the second half of 2010 or 2011. Taking all of this into account, Coal Age predicts that U.S. coal production will improve 2% in 2010 or 22 million tons to 1,102 million tons.