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Power Measurements

What's causing price volatility, and will it last?
Fortnightly Magazine - September 2004

PRB coal prices have remained low during the otherwise national run-up in price is because although PRB mines can produce more coal, it can't easily be moved to market. This creates an unusual kind of "supply surplus" in the PRB where supply-side transportation constraints keep prices low, which is the opposite effect usually seen in demand-side transportation constraint situations. How new railroad infrastructure development costs will be dispersed in the marketplace is a subject of much discussion. It is safe to assume that suppliers, transporters, and consumers all will bear some of the cost in one way or another. But reducing transportation congestion out of the PRB may be a necessary precursor for permanent PRB price increase.

Production of bituminous coal in the West occurs in the insular Northwest and Four Corners supply regions and in the more nationally important Rockies regions (Colorado, Utah, and southern Wyoming). Rockies coal is abundant, but not readily available, except in Colorado. New development, especially in Utah, will be needed to decouple Utah coal prices from those of natural gas. Even in the Colorado region, coal prices react somewhat in concert with CAPP coals; though Colorado mines can produce more, the process can take longer than in CAPP owing partly to the fact that there are only a few mines in Colorado while there are hundreds in CAPP.

Rockies coal prices at the mine are in the $21/ton ($0.91/MMBtu) to $26/ton ($1.12/MMBtu) range at this time, with the higher-priced coal coming from high-heat content Utah and Colorado mines. These prices are not expected to moderate for two years. Additional coal production may be added in Utah, which would create downward pressure on Rockies prices.

Natural gas prices effectively set the ceiling for coal prices, but mining costs set the floor. In all cases, coal prices will no longer fall below full production costs for any length of time, as they did during the 1990s, regardless of the price of natural gas. The long period of sub-full-cost pricing in the 1990s caused great rationalization in the coal industry, leaving a much healthier and sensible market. One consequence of this is that the floor price for coal in most regions has risen about 25 percent in the last few years. With natural gas prices expected to remain high for some time, those coal markets where ready capacity is at current demand levels will see steadily high prices.


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