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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

to haul coal out of the region. Most critically affected are the eight mines located on the “joint line” serviced by the UP and BNSF railroads, which had estimated proved in-place capacity of 347 million tons in 2005.

Many major coal consumers believe that railroads provided only about 90 to 95 percent of the actual coal demand originating on the joint line in 2004, and that proportion fell to 85 percent in 2005 when derailments and line reconstruction severely restricted coal originations. Thus, actual production from these mines could have reached 374 million tons in 2005—about 8 percent above their proved in-place capacity. While there are plans to expand production by adding a new mine and increasing capacity at existing mines, information about the mines’ capability to handle this demand, should transportation be provided, are incomplete. Further, although the railroads have promised greater capacity, performance in 2006 to date indicates a high probability that they will fall short of the 375 million ton level.

Production, production capacity, and transportation capacity remain problematic in this key coal-producing region, where veiled references to limitations and restrictions on the demonstrated reserve base (from the state and federal geological surveys) and speculation on sufficient future transportation capacity depends on not-yet-financed “mega” projects and double-digit rate increases, rather than on solid research backing a strategic vision. The situation begs for a thorough analysis of both demand-side factors (location of more PRB switches and new plants), the sustainable level of mining given reserve and geological constraints, and the transportation infrastructure needs to service new business.

Since late 2003, most of the focus of coal consumers and producers has been on prices. The exception is the PRB, where supply has been an equally high-profile issue since 2004. This is more related to the two major Western railroads’ ongoing inability to provide sufficient capacity to move PRB coal, rather than to the production capacity of the mines themselves. In the East, coal production capacity continues to receive some attention—especially the capacity in Central Appalachia (CAPP) to supply compliance and low-sulfur coal.

While Eastern transportation has been a problem since 2004, the unavailability of coal to ship causes as much concern as transport bottlenecks. While the high anxiety that occurs from time to time relative to CAPP coal is not prevalent for other Eastern coal-supply regions, there have been spotty shortages in Northern Appalachia (NAPP) and the Illinois Basin (ILB) when extraordinary circumstances stimulated demand. Similarly, in the non-PRB West, traditional consumers of Colorado-origin and Utah-origin coals have experienced some sustained shortages as these regions experienced short-term mine outages and also were tapped to replace constrained PRB coal supply.

A generally tight national coal-supply situation continues to exist in mid-2006. This suggests that perhaps a more poignant short-term issue exists—whether or not the U.S. coal industry can deliver the new supply projected for the next five years, let alone attract enough investment to more than double production over the next 20 years. Consider the following observations:

• Central Appalachia proved in-place production capacity declined by 8 mtpy in 2005, despite record