By Steve Fiscor, Editor-in-chief
The U.S. coal industry is looking forward to a healthy 2011 and a robust 2012. Last year was a tough year for underground coal operators as the Mine Safety and Health Administration (MSHA) stepped up enforcement throughout the coalfields. Surface mine operators in the East were similarly frustrated by the Environmental Protection Agency (EPA) dragging its feet on permits and then changing some of the rules midstream. While coal consumption at the nation’s power plants grew at a healthy 5% clip in 2010, overall coal production capacity declined before improving later in the year, which meant utilities had to draw down record stockpiles established in 2009.
Likewise, the metallurgical coal market remained healthy throughout 2010. So much so, U.S. coal operators were complaining about the inability of the railroads and the ports to move product. For the first time, the industry began to ship Pittsburgh No. 8 coal to China, labeling it a “crossover coal.” Cloud Peak Energy exported 940,000 tons of sub-bituminous coal to Asia in 2010. The lure of high metallurgical coal prices and increasing Asian demand, pushed many U.S. coal operators to find ways to get in the game. Then, in early January, torrential floods crippled Australia’s coking coal export business. Spot prices for metallurgical coal could become fairly outrageous in the next few months as Asian customers grow desperate for coal. The market is expected to remain tight for the rest of the year.
Every January, Coal Age conducts its Annual Forecast survey. The informal study gives an assessment of the current market situation, as well as the state of mind among coal operators. Based on that information, and information from the leading coal companies, the Energy Information Administration (EIA) and the Edison Electric Institute, Coal Age tries to make an informed decision about future market trends. Last year’s Annual Forecast prediction might have panned out if MSHA enforcement had not slowed production. It predicted a 2% increase in U.S. coal production, or a 22-million-ton increase. As can be seen from the Top 10 Coal-Producing States chart (See News, p. 5), total U.S. coal production grew by less than 1% in 2010, or about 8.5 million tons. A little growth is better than no growth, and observers should not lose sight of the fact that the U.S. mines more than 1 billion tons of coal annually.
Electricity demand and coal consumption increased in 2010. As a baseload fuel, coal consumption can be considered a leading indicator. As America’s factories power up so does the country’s appetite for fuel. Overall demand for power increased 4.1% last year after falling 3.4% in 2009 and 0.9% in 2008. Coal-fired generation increased 5% in 2010 after dropping a record 10% in 2009. Low natural gas prices and economic uncertainty, however, kept utility coal buyers thinking short term. Meanwhile stocks eroded and spot coal prices began to track upward later in the year. Many economists believe the U.S. has entered the early stages of an economic recovery. They expect a 2.2% increase in GDP in 2011 and a 2.9% increase in GDP during 2012, which bodes well for longer-term supply-demand fundamentals.
Setting supply-demand fundamentals aside for a 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 singled out the Obama administration as an impediment toward future growth. While the short-term mood of the respondents was tepid, long-term they remain highly optimistic.
This Year Will be Good and 2012 Will be Better
Coal Age contacted 1,338 readers and received 237 completed surveys. The demographics largely resemble the U.S. coal industry. The majority of them (73%) produced bituminous coal. Sub-bituminous, lignite and anthracite accounted for 15%, 9% and 3% respectively. As far as production capacity, most of the respondents represented large mine operators (more than 5 million tons, 57%), followed by medium (1-5 million tons, 28%) and small (less than 1 million tons, 14%); 37% described themselves as underground coal operators exclusively, while 18% said they only operated surface mines. The remainder (51%) said they worked for a company that mined coal using both surface and underground techniques. Similar to years past, most of the respondents said their coal went to electric utilities (71%). The remainder said their coal was destined for steel mills (20%) or industrial boilers (9%). Previously, those two segments were more evenly divided. The change could be related to the desire to take advantage of metallurgical markets.
Of the executives surveyed, 57% thought coal production would increase in 2011, while only 12% felt production would drop and 31% said production would remain the same. Last year, 38% of the respondents thought 2010 coal production would increase. Looking ahead to 2012, an even greater number of respondents (59%) thought production would increase over 2011.
The question regarding productive capacity generated a similarly optimistic response (See Figure 5). Approximately one-half of the respondents thought their mines would run at 90% capacity or greater. The number of respondents that thought their mines would run at less than 90% had consistently increased from 31% in 2007 to 68% in 2010. Now it appears that trend might be reversing or, if nothing else, it has reached a plateau.
Despite all of the regulatory hassles, more than one-half (54%) of the respondents view 2011 with optimism. That represents a dramatic swing from last year, when 43% were pessimistic and only 34% were optimistic about future prospects.
Coal mining is a capital intensive business. When asked about their capital budgets, 25% of the respondents reported they would spend more than $100 million this year. The distribution broke evenly at the $25 million mark, with 53% spending less and 47% spending more. While 27% said they would spend less than $1 million, 26%, $10-$25 million; 13%, $25-$50 million; and 9%, $50-$100 million. More than one-half (53%) reported the capital budget for 2011 had increased, while only 21% said it had decreased. When asked how they would spend the money, they said new equipment (77%), mine development (68%), permitting (54%) and new mine start-up (41%). New mine start-up climbed the list from 26% to 41%. It looks as though coal companies are already preparing for a robust 2012.
The survey also asked about the single most expensive item the mine planned to purchase in 2011. The answers (See Figure 6), as one would expect, ranged from $180 million for a longwall to $650,000 for a water truck. A total of 27 respondents said they planned to buy a continuous miner and seven said they would build new prep plant. Really impressive numbers (hundreds of millions of dollars) were mentioned in association with reserve acquisition, mine upgrades and new mine start-ups.
When asked how their money would be allocated on a percentage basis, the respondents said 33.8% of their money would be spent on new equipment and only 18.3% would be spent on equipment rebuilds (See Figure 8).
Coal operators expressed a lot of frustration in the survey. As an example, one respondent wrote, “the EPA must be brought under control and forced to justify rulemaking based on science.” Another wrote, “MSHA will drive the cost of operation up for the bigger companies and the smaller companies out of business. The coal industry needs to stop this takeover by government.”
When asked about what specific issues will affect the coal industry the most in 2011, the overwhelming response was politics. This year, however, permits and power plant regulation displaced the economy and prices for the first time in recent memory. What the miners are saying is that prices and the economy do not matter if they can’t operate a mine or their customers are not allowed to burn coal. Limited production capacity was the least of their concerns.
International Markets Remain Tight
Steam coal is in high demand globally and some analysts believe demand could eventually overwhelm supply. Chinese steam coal imports increased 20% during 2010. India imported 30% steam coal in 2010. For the year, India is expected to import 100 million mt, 36% more than 2009. By 2015, worldwide coal-fired power is expected to increase by more than 380 gigawatts, which equates roughly to another 1 billion tons of coal. By 2030, worldwide coal-fired power is expected to increase by 1,000 gigawatts, which could be 3 billion tons.
Chinese growth is expected to be at least 8.5% in 2011. Coal-fired power generation in China has increased 19% and steel production has increased 15% during 2010. China’s net imports are expected to reach 135 to 140 million mt.
The demand for steel is improving in the U.S. and abroad. Global blast furnace production increased 19% during 2010. Chinese steel production climbed 15% in 2010 and the country’s metallurgical coal imports could exceed 40 million tons. Global steel consumption is projected to increase more than 30% during the next five years, which will require more than 300 million mt of new met coal supplies.
For the full year, global seaborne met demand is expected to reach a record 270 million mt, a 35% increase over 2009. Seaborne thermal coal demand in the Pacific Rim is expected to rise more than 15%, exceeding 500 million mt.
Metallurgical coal markets, both domestic and international, had improved substantially toward the end of 2010. Regulatory issues, both environmental and safety, will constrain production, especially in the East. Several key metallurgical coal mines closed and U.S. reserves have become constrained as foreign steel companies purchased several U.S. metallurgical coal producers in an effort to integrate vertically. Domestic steel makers were locking in 2011 prices during the third quarter of 2010.
Prior to the flooding, Queensland was already struggling with infrastructure and export capacity was restrained. The calamity has now strengthened the prospects for the metallurgical market even further in 2011. New sources for Asia exist in Mongolia and Mozambique, but they are years away from becoming a reality. To sustain current growth levels, the coal will have to come from the U.S. and Canada.
U.S. coal exports are expected to reach 80 million tons again in 2010. In 2009, the U.S. exported 59 million tons (37 million tons met vs. 22 million tons steam), as opposed to 2008 when America exported 81 million tons (43 million tons met vs. 38 million tons steam).
Domestic Markets Improve
Total 2010 U.S. coal will probably increase 9 million tons to 1,084 million from 1,075 million tons in 2009, which was an almost 100 million ton drop from 1,171 million in 2008. Overall, Wyoming benefited the most from improving coal markets with production increasing about 10 million tons (2.3%) to 434 million tons. Montana and Texas also saw double digit increases in production. The rest of the country was either flat or down 2% to 3%.
Some coal producing regions will gain at the expense of others while overall demand increases. Many coal operators see Central Appalachian (CAPP) production declining by as much as 40 million tons in the next few years and that demand subsequently shifting to either Pittsburgh No. 8 seam mines or the Illinois Basin. CAPP 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. West Virginia also has some key advantages, namely a high-quality product in close proximity to power plants and export markets, and a more powerful political voice in Washington, D.C.
American factories run on electricity and demand will reappear when that manufacturing base begins to grow again. As of October 2010 (latest stats available from the EIA), utility coal consumption stood at 818 million tons, compared to 773 million tons at the same time in 2009 and 872 million tons in 2008—just prior to the economic collapse. Total coal consumption for 2009 amounted to 935 million tons. Giving an optimistic level of consumption for November and December 2010 of 80 million tons per month (a total of 160 million tons), final 2010 utility coal consumption might amount to 978 million tons, a total increase of 43 million tons.
Constrained production led to a draw down in high stocks. Utility stockpiles reached a record of 204 million tons in November 2009. They gradually declined to approximately 160 million tons by August 2010 and reached 175 million tons by October 2010 (latest stats available from EIA).
High stockpiles and low natural gas prices tend to make utility coal buyers complacent. That would not be a wise approach now. Spot prices have increased to mid-2007/2008 levels. As an example (See Figure 4), December 2010 spot prices for Northern Appalachian (NAPP) coal grew to $70/ton from $52.50/ton, not nearly as high as $101.50/ton in 2008, but getting there. At the end of 2008, a similar market situation saw a huge run-up in prices that hinged on activity in the met markets.
Looking forward to 2011, the EIA said it expects coal-fired power generation to decrease by 1.1% in 2011, citing increased competition from renewable sources. They know who signs their checks. The EIA expects coal-fired power to increase 2.7% in 2012 with overall electric power demand growing by 3.6%.
If the U.S. economy improves as predicted and international markets remain tight, prices for prompt coal deliveries could spike again. Unfortunately, the jobless rate in the U.S. still remains high and Main Street has still not seen an improvement in the economy. Considering the levels of stockpiled coal at electric utilities, increasing utility demand and competition from exports, coal markets will tighten in 2011 and become very tight in 2012. More U.S. coal operators will find a way to export coal to Asian markets. Anymore major supply disruptions will only exacerbate the situation. Taking all of this into account, and assuming the economy continues to plod along, but foreign demand remains high, Coal Age predicts U.S. coal production will improve at least 2.4% in 2011 or 26 million tons to 1,110 million tons.