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A Wakeup Call for Coal

U.S. imports make up the fastest-growing segment of the industry. Are we prepared?

Fortnightly Magazine - December 2006

level price signals since late 2003. Since 2001, CAPP proved in-place production capacity has declined at a rate of 5 percent per year, and a total of 73 million tons of capacity has disappeared.

• Northern Appalachia production capacity declined by 3 mtpy in 2005. With the exception of a modest recovery in 2004, NAPP proved in-place capacity has declined steadily since 1998, at a rate of 2.7 percent per year. A total of 36 million tons of capacity has disappeared since 1998.

• Coal stockpiles—the safety valve for supply disruptions—reached near historic low levels in 2005. Stocks remain precariously low because coal producers and transportation providers cannot meet demand for current burn and stock replenishments.

Current statistics could be interpreted as a warning that near-term U.S. coal demand may not be met fully without significant growth of imports. Further, the lack of capacity growth in some key regions despite sharp upward price shocks indicates that the cost of new supply may be much higher than even current prices—and certainly much higher than the embedded costs that domestic power generators are accustomed to paying for coal supplies.

The NCC report does not estimate the cost of expanding coal production and supply infrastructure to handle an additional 1.3 billion tons per year; however, it estimates the current value of investment in coal-conversion technologies alone at $515 billion. Even using moderate assumptions, expansion of supply capacity from a current level of less than 1.4 billion annual tons to 2.5 or 2.6 billion annual tons likely would add billions of dollars to investment needs.

In addition, billions of dollars more are needed for rail infrastructure, rolling stock, port and waterways expansion, barges, and other facilities. Although risk for some of this investment may be mitigated by special government treatment, the lion’s share will have to be raised in the capital markets.

Significant levels of investment, and perhaps even a realignment of the coal-supply infrastructure to support more coal imports, may be required to meet coal demand for the next five years. Pressure to increase U.S. reliance on the domestic coal industry to offset detrimental economic and geopolitical forces that have coalesced in the past five years only underscores the importance of looking at supply capability prior to stimulating demand.

Before embarking on an effort to increase demand by 1.3 billion annual tons, it is prudent to evaluate individual segments of the supply chain—coal basins; reserve blocks; structural, cultural, and environmental constraints; transportation corridors; and other “choke” points—that may prevent servicing the additional 100 million to 140 million tons of coal demand that might possibly materialize in the next five years, let alone another billion tons of demand by 2025. While there is, no doubt, a lot of coal in North America, perhaps we also need to know what the price at the burner-tip will be for the next 100 millionth ton—and for that two billionth ton.



1. More information about Can Coal Deliver?: America’s Coal Potential and Limits can be found on our homepage at