By Lee Buchsbaum
According to the variety of producers and analysts who presented at the recent 10th Coaltrans Americas Conference, which was held during January, in Miami, Fla., 2010 may develop into a much larger export year than even 2008. Recent demand from Asia and South America, coupled with port congestion in Australia and other constraints worldwide are set to bring more buyers back into the U.S. markets. Though relatively flat for the domestic thermal market, 2009 was a surprisingly positive year for exports, the highlight of which was the first shipments of metallurgical coal to China from the U.S. Atlantic coast.
Though accounting for only a fragment of overall North American production, exported coal, both thermal and high margin metallurgical coal will likely become the industry’s main growth category as producers deal with a weak U.S. economy, a sputtering industrial recovery, inexpensive natural gas, tentative domestic steel production, and record utility coal stockpiles.
Conversely, with more than 40% of the world’s population, coal is the overwhelming fuel of choice for the rapidly industrializing BRIC countries of Brazil, Russia, India, and China. Globally, the entire metallurgical market should rise to 235 million tons by 2011.
The Great Recession may prove to be an economic turning point as Asian economies thoroughly supplant western ones as leaders in global steel production and GDP growth. Nowhere is this more apparent than in China. In 2000, it accounted for 15% of world steel production, but by the end of 2009, Chinese production increased to 47% and doesn’t look to be slowing any time soon. “The growing met market has some legs. It’s going to be strong this year, stronger than it has been of late,” said Matt Preston, an analyst with Woods Mackenzie and leader of their North American coal markets team. The question is to what extent U.S. producers can further penetrate and maintain a sustained market share in Asia.
Ken Kisko, president of CoalUSA, believes that as demand heats up, coking coal prices may touch $200 per ton in 2010-2011, but unlike years past, pricing will not be determined domestically. “U.S. steel producers no longer benchmark met coal. In this marketplace, they must compete with international demand and price,” said Kisko.
Worldwide, the entire coal market is roughly 6 billion tons, 650 million tons of which is entering the seaborne market. “World demand should grow by another 2 billion tons. Worldwide you will need another two U.S. coal districts, and the lion’s share of demand growth will be in the Pacific Rim nations,” said Kevin Crutchfield, president and CEO, Alpha Natural Resources. He feels that North America represents a likely source of backfill as the Chinese, Indian, and other economies increase their appetite for coal. The role U.S. coal operators play in that burgeoning market will determine which companies will thrive and which will go under or be consolidated. Long considered a “swing” supplier, with port space on every coast getting tight, the pendulum has clearly returned to America’s shores.
Built Like a BRIC….
Over the last decade, China and India have become the world’s largest coal marketplaces. The two countries soaked up more than 3.4 billion tons last year, a rate that is increasing roughly 300 million tons per year (tpy). Last year, nearly 40 million tons of met coal were expected to be imported to China, up from “only” 7 million tons in 2008. In the process, it has become the second largest met importer after Japan, which imported roughly 55 million tons in 2009.
Along with China, India also represents a huge potential power market. According to a recent article in The New York Times, one of the goals of the Indian government is to install an additional 100,000 mw of power by 2012. Much of the coal required for this build out, necessary both to support manufacturing and to ensure power to more than 80 million households, will be imported. “In 2003,” stated the article, “India imported 23 million tons. By 2008, the number had doubled. By 2013, the number is expected to exceed 100 million tons.”
With all the attention on Asian markets, it is easy to forget that Brazil is also increasing its steel output and coking coal imports. “South America produced about 29 million tons of steel in 2008 and about 85% of total production was in Brazil,” said Carlos Heitor M. De Fario of Sage Consultoria, in his presentation at Coaltrans. “South America, again mostly Brazil, imported almost 34 million tons of coking coal in 2008 as well.” Arcelor Mittal owns three of Brazil’s eight steel mills. “At the moment, there is virtually no holding back on capital constraints,” said De Fario. The question is how to get enough coking coal into Brazil as the country rapidly increases production for the Olympic games and beyond.
Meanwhile, use of finished steel in the U.S. has declined 15% since 2002. In Japan, historically one of the world’s largest steel manufacturers, total steel production dropped from 118 million tons in 2008 to roughly 87 million tons in 2009.
Global Port Congestion
Coal shipments of any kind from Baltimore or the Port of Hampton Roads to Asia would seem counterproductive considering the immense distances involved. Yet, the demurrage charges levied on shippers waiting off the coasts of South Africa and Australia—the latter of which is experiencing weeks of delays—needs to be taken into account when looking at pricing. “If you’re waiting 30 days off Australia, you can use that ship better by sailing to the United States and taking coal there,” said Preston. Sitting still for that length of time, with typical demurrage charges of $40,000 per day or more for larger vessels, is simply not an option. It’s worth it for Chinese and Indian buyers to sail the extra length and take advantage of excess capacities and quicker ship turn around times. However, Preston still believes the freight handicap for U.S. met coals competing with Australia and Western Canada will remain a significant obstacle for large volume traders going forward.
Indonesia, long a supplier of sub-bituminous thermal coal throughout Asia, is now facing both infrastructure constraints and a government decree that requires Indonesian producers to demonstrate that they have satisfied all internal needs before exporting coal to any other country. “Indonesian exports will go down this year and additional thermal coal from Australia could be crowded out of ports by high margin met coals,” said Curt Woodworth, a metals and mining analyst with Macquarie Capital.
Tom Hiemstra, an analyst with Evolution Markets, suggests that in addition to port congestion being at an “all time high” off Newcastle, a weak dollar could drive buyers straight to the U.S. “With relative supply inelasticity, you may see a commodity price correlation similar to 2008,” he said, referring to when buyers bid up FOB prices to secure vital supplies.
Expanding Met Markets Help NAPP, CAPP and Gulf Producers
According to government figures cited by Massey Energy, while U.S. coal exports plunged 30% last year, met shipments to China jumped to 386,950 tons, up from 86,596 in 2008. “If you’re a CAPP producer like Massey or Alpha, you’re facing declining domestic demand, rising production costs, environmental uncertainty and lots of competition from lower cost Illinois Basin and NAPP producers. Without producing from and exporting your met coal reserves, where are your markets going to be going forward?” said Preston.
Over the next few years, Massey plans to increase metallurgical coal production as much as 62% to meet demand from the rapidly recovering Asian economies. Last year, Massey’s metallurgical sales totaled 7.4 million tons. Looking into its crystal ball and its order sheets, Massey now expects met coal shipments in the range of 10 to 12 million tons in 2010, with a projected 15 million tons by the end of 2012. Massey CEO Don Blankenship said much of the increased production is going overseas, including 2 million tons to India. The company has already announced plans for a joint development venture with India’s Jindal Steel & Power (See World News, p. 8) for mines in Asia, Australia and the United States, potentially allowing Massey to move into regions with direct links to the surging coal markets in China and India. Worldwide “our customers are increasing their production plans and our order book for 2010 has increased,” said Blankenship.
To meet those increasing customer demands, Massey is ramping up production at seven met mines and bringing on new continuous miner sections at its Mammoth, Inman and Guyandotte resource groups by May 2010. Additionally, three existing met mines at the Logan County mine and the Elk Run resource group are increasing production levels. This is in addition to the ongoing development of Massey’s Rowland property, where an initial deep mine is slated to begin production of low volatile coal in the second or third quarter of 2011 at an annualized rate of about 1 million tons. When complete, Massey expects the new resource group to produce approximately 2 million tons of low and mid volatile metallurgical coal annually and employ up to 500 workers.
As the largest U.S. exporter of met coal, Alpha Natural Resources plans on shipping between 11 and 13 million tons of met coal in 2010, with 62% already sold. They have also announced plans to ramp up construction of the Deep Mine 41 to bring more met coal to the market. Crutchfield sees about two-thirds of their coal being sold to customers in Europe, with the rest split evenly between the Middle East, India and South America. “We would expect the European Union to pick up relative to where they were in 2009, for Brazil to move up 3 to 4 million tons, and for India to take 3 to 6 million tons,” he said.
During Alpha’s fourth quarter earnings call in early February, Crutchfield referenced “an Asian deal that will portend nicely to the erosion of the transportation delta” between East and West coast shipped coal. “We’re looking at all of Asia, not just China. It’s still too early to be advertised, but we have a significant transaction in that neck of the woods,” he said. “It involves not just Pittsburgh No. 8 coal [which is often sold as PCI coal], but a nice blend of coals into Asia. If China continues to grow its steel business, it sees challenges out of other parts of the world taking out met coals. That transportation delta needs to fade.”
A Rising Tide Lifts All Boats
In late January, CONSOL Energy announced its sale of 410,000 tons of high-vol coking coal to China (See World News, p.xx). Xcoal Energy & Resources a global coal trader, marketer and coal procurement agency led by Ernie Thrasher, made the sales, which are the result of the Asian Marketing Initiative announced in December.
Also in January, INR Energy, LLC, a Richmond, Va.-based CAPP producer of met and thermal coal, announced their first vessel shipment of coking coal destined for China via Newport News, Va. “The Panamax vessel of approximately 72,000 metric tons is the first of multiple shipments of INR coking coal to Asia,” INR stated in a press release. “While INR has always served the European steel producers, this opportunity opens a vast new market for our coking coals and helps establish INR’s name in the Asia/Pacific region,” said INR CEO Gary Rogliano. Like other producers, INR has begun development of new mines that could begin to produce up to 1 million tons beginning in mid-2011.
Throughout the nation’s coalfields, any producer who has access to met and PCI coals is trying to position themselves into this growing market opportunity. Alliance Resources announced the probable ramping up of its lone met operation, the Mountain View mine in Northern Appalachia, which sells approximately 1 million tons annually for the coking coal market, as the company looks to add between 450,000 and 600,000 tons of PCI coal to the market each through the next several years. The International Coal Group, Patriot Coal, and other eastern producers have likewise announced ramp ups of existing operations or plans for developing others.
In Alabama, Walter Energy reported that their met coal sales are “going to existing customers, but we are shipping a couple of boats to Japan,” said George Richmond, COO. Walter also has 4.7 million tons of 2010 production still un-priced, which they are likely going to sell to Brazil and Europe rather than China. “We get inquiries from China all the time. It’s not that we can’t sell to China. It’s just that we have had better opportunities elsewhere,” said Victor Patrick. Walter Energy also reported that they will ship every ton of their carry over coal from 2009, especially those purchased back at the top of the 2008 market and priced at $315/mt.
Domestic Port Constraints
Export vessel and storage space is getting tight in a hurry in the Baltimore, Newport News and Hampton Roads port facilities. In 2008, Dominion Terminals, jointly owned by Alpha, Arch and Peabody, Kinder Morgan’s Pier IX, and Norfolk Southern’s massive Lambert’s Point terminal were able to move a combined 42.3 million tons, the most in over a decade, and a nearly 50% increase from 2007. After a slow first half of 2009, orders from throughout the world started pouring in and the ports geared up. As the calendars changed to 2010 and NS declared force majeure at Lambert’s Point due to a belt fire, there were already 11 ships queued. The recent snowstorms in the mid-Atlantic have continued to challenge the transportation chain, slowing mine loadings, rail shipments and ports too.
In 2008, Kinder Morgan’s Pier IX coal export terminal in Newport News, transloaded a record 9.6 million tons from trains to seagoing vessels. “Last year in a down market, we shipped 7.96 million tons. That’s not too bad,” said Will Browning, commercial manager, Kinder Morgan. With an optimal capacity of 12 million tons, “we see a tight market for terminal capacity going forward.” He cautioned that in order for Pier IX to reach that level, all aspects of the supply chain must work smoothly, though between weather, shipping schedules, ships and railroads, that rarely happens with consistency.
Seeing that it could be tight for some time, Kinder is beginning to create options in some of their non-traditional east coast terminals. “With demand rising sharply, you look at all your options,” said Browning. “We do have other smaller terminals in Tampa, Fla.; Fairless Hills, Pa.; and elsewhere. It’s not easy but we might be able to push some coal out of there. We’ll need flexible clients with smaller ships, and loading times won’t be as quick as they are at our larger terminals. But we are doing what we can to make these options available.”
While Browning thinks there may be limited spot options for a few smaller cargoes, for the most part, “We are currently booked through our normal exporting terminals, and you’re going to hear similar things from other terminals. People would not be calling us if they weren’t having trouble finding spots.”
Kinder’s next best option is their International Marine Terminal in New Orleans, though even that is filling up quickly. “Now that the markets have come back, it’s very tight,” Browning said. “With a large network of ports, Kinder does as much as possible to work with their good customers to find something for them in one place or another.”
Kinder’s out years are starting to fill up too. “The longer-term customers we signed on in 2008 had terminal space signed up in 2009. They just had to make it through a tough year and now they can really reap the benefits,” said Browning. At this point, he fears that new customers “might be standing in line a couple of years before you can get significant space on the east coast—unless we can develop some other options.”
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.