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this should help moderate out-year NAPP pricing.
Southern Appalachia coals are produced and consumed regionally. This niche market has always been high-priced ($35/ton to $40/ton, $1.40/MMBtu to $1.55/MMBtu FOB mine), and has not reacted as dramatically to high prices in CAPP and NAPP. Even so, when CAPP and NAPP prices moderate, the price for better SAPP coals will not fall below $35/ton at the mine.
Interior Coal: Will It Take Eastern Coal's Place?
The largest of interior U.S. coal supply regions is the Illinois Basin (ILLB). Long a victim of the effects of the 1990 Clean Air Act Amendments, a result of which was a decline in the use of ILLB coal, the region is experiencing a production rebound in response to increased overall demand and expected new scrubbed coal plants. In fact, should NAPP falter as a replacement for CAPP coal, the ILLB could supply coal into those Eastern coal markets where sulfur is not a great issue, such as into scrubbed Eastern power plants.
Many of the newly announced planned coal-fired power plants in the United States will use ILLB coal for fuel. This is due primarily to its abundance, but also to its better price and location. Still, ILLB prices have followed CAPP prices upward but not to CAPP price levels, because more ready capacity exists in ILLB and its coal quality is poorer. ILLB prices at the mine are likely to range from $30/ton ($1.30/MMBtu) to more than $40/ton ($1.65/MMBtu) at the mine for the next two years before giving ground in a more gas-abundant climate.
Western Coal: If All Else Fails
Should ILLB or NAPP coal fail to capture the anticipated CAPP production decline, or should Eastern bituminous coal prices stay high for an extended period while PRB prices remain low, then the PRB will be examined carefully by Eastern generators. If Eastern generators are locked into low sulfur or compliance coals, or if SO2 allowance prices continue to rise, then PRB coal will be examined even more closely, since alternative coals to CAPP in the East are all higher in sulfur. Of course, a switch to PRB coal could involve plant modification and a possible de-rate.
Its great abundance, ease of mining, and suitability to quickly adding production capability without considerably adding to unit-mining cost make PRB coal less likely to react to changes in natural gas price. Rather, PRB prices likely will increase over time at a regular, predictable pace as PRB mines develop into regions with higher and higher stripping ratios. These cost increases will not be dramatic, as they are in the eastern United States. From a level of about $5.50/ton ($0.32/MMBtu) today, expect higher heat content PRB coal price to grow steadily at about $0.25/ton to $0.50/ton per year nominal. Lower heat content PRB coal (8,400 Btu per pound of coal) will grow at the same rate but from a level today of about $4.50/ton ($0.28/MMBtu).
While it is relatively simple to add new production capacity in the PRB, moving that new production to market will require significant railroad investment. One reason