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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

perhaps a catastrophic collapse similar to that witnessed in the U.S. natural-gas sector earlier this decade. But just what is meant by coal-supply capacity?

The typical energy balance approach espoused by the International Energy Agency (IEA) and also followed by the EIA defines supply as the sum of production, stock changes, and net imports. Net imports consist of total imports minus total exports. When exports exceed imports (as they do in the United States), net imports is a negative number. Based upon an observation of time-series data used to calculate coal supply, there have been warning signs that the U.S. coal sector has been experiencing some contraction of its “supply capability” for several years.

Coal exports—mostly coking coal—declined steadily from 1996-2002, and only recovered modestly from 2003 as global coking coal prices tripled. Domestic consumption plus net imports significantly have been greater than production since 2003. Additionally, stocks have declined in four of the last six years. While all of these factors suggest a weaker domestic supply chain, they are primarily measures of flows rather than capacity.

A Different Approach

One prominent component of capacity is the capacity to produce coal. Coal-production capacity statistics are collected by the EIA on Form EIA-7A, which requires reporting “the maximum amount of coal that your mining operation could have produced during the year with existing mining equipment in place, assuming that the labor and materials sufficient to utilize the equipment were available, and that the market existed for the maximum coal production.”

Unfortunately, EIA data is collected only once per year, and the lag time is significant: Coal production capacity data reported for 2005 will be available in late 2006. Further, the data are published at the regional and state level, but do little good for industry analysts trying to maintain a timely measurement of the pulse of productive capacity on anything but an anecdotal basis.

It is impossible to use the data to do mine-level analysis. And without mine-level aggregation capability, it is impossible to conduct timely measurements of coal production capacity by quality category, rail-origin capability, productivity range, mine type, or any other of a number of reasonable categorizations. Because of the annual data collection and the time lag in publication, the data provide no insights into capacity changes throughout the year as new mines open and close. They are excellent sources of “after-the-fact” statistics to confirm the accuracy of other techniques for estimating capacity, and undoubtedly will have great value for the assignment of blame by officials and senior management should catastrophic capacity failures occur.

Because of limitations in the EIA capacity statistics, Global Energy developed alternative approaches to estimating coal-production capacity. The most straightforward is the “proved in-place” capacity method. To calculate the capacity using this approach, we used quarterly production statistics reported on MSHA Form 7000-2. These data are collected quarterly and published with a lag time of 60 to 90 days. Thus, they can be used for analysis of changes throughout the year and are available (in a preliminary form) much sooner than EIA capacity statistics. The approach used