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Coal: Inconvenient Truths

The current coal bust might lead to a future boom.

Fortnightly Magazine - February 2008

coal basins.

Coal Price Forecast

FOB mine prices likely will escalate over the next 25 years due to increasing production costs coupled with growing demand. Unparalleled mining conditions allow the PRB to have much lower FOB mine prices than other areas with smaller, less productive mines. Short-term FOB prices for South American imports will rise due to increased Atlantic Basin demand for the coal, coupled with a weak U.S. dollar. At the same time, expanded supply with weakened European demand will dampen import coal prices through the long term. Northern Appalachian FOB prices should experience the strongest growth over the mid term due to robust demand. FOB coal price inflation will be tempered by escalating competition among the basins for customers that have the ability to switch to a primarily Btu-centric rather than sulfur-centric coal product.

Of all the transportation issues facing the U.S. coal markets, expansion of existing rail and development of new rail in the PRB will have the biggest impact on U.S. coal consumption patterns. In addition to plans by UP and BNSF to expand the existing lines, there are two major plans to add more transportation capacity out of the PRB: the Dakota, Minnesota & Eastern Railroad and development of the Tongue River Railroad. Increased competition for tonnage from the PRB could be the only check on the two major rail carriers’ stranglehold on Western rail pricing, which likely will show the greatest increases over the forecast period—nearly 30 percent, compared to about 15 percent for Eastern rail.

Besides western rail pricing and bottlenecks, forecasted coal transportation will be dependent upon a wide variety of factors. Barge pricing likely will remain flat in constant dollars over the 25-year period, with volatility over the short- and mid-term. Lake vessels also will show little pricing inflation, although environmental concerns coupled with climate change related freezing/thawing patterns could add uncertainty. And current extremely high prices of ocean vessels should settle down with increased availability and port expansions on the way.

Increased FOB mine and transportation prices will translate into continued pressure on the delivered price of coal. While the PRB has low FOB mine prices, the coal produced is transported great distances and in great quantities because of its low heat content. Eastern regions (Southeast and Northeast) have high delivered coal costs because of higher Eastern mining costs or very high transportation rates for cheaper western coal. Colombian imports also keep Eastern prices high due to high transportation costs. For Western coal consumers, lower prices and short hauls equates to retaining the lowest burner-tip price of coal, even with considerable inflation over the forecast period (see Figure 4) .

While the North American coal industry is experiencing anxiety attacks today, mostly over the uncertainty of CO 2 emission reduction requirements and the rising costs of new plant construction, the long-term prospects for coal remain solid based upon fundamentals.