With the Environmental Protection Agency’s proposed greenhouse gas (GHG) emissions standards expected in June 2014, many states are considering their own approaches to provide flexibility in...
Coal: Inconvenient Truths
The current coal bust might lead to a future boom.
frame as demand for coal as a source for power generation increased to meet bourgeoning demand for electricity in the United States.
Transportation costs factor strongly in the ultimate delivered price at the plant. For instance, 60 percent of the delivered price of coal produced in the PRB is attributable to transportation costs, on average. Rail is the transportation method most heavily relied upon in the coal industry due to the vast geographic area that rail infrastructure covers and its ability to move large amounts of coal long distances through varied terrain. Almost 72 percent of coal deliveries use rail transportation for at least a portion of their journey. Rail capacity issues are particularly important for PRB coal, where the average haul distance is 1,200 miles to the plant and 2,400 miles roundtrip—almost exclusively by rail. Union Pacific (UP) and Burlington Northern Santa Fe (BNSF), the only railroads serving the PRB, are investing in capacity expansion, and another railroad might construct a line into the PRB.
River barges offer one of the most economical ways to move coal large distances on a cost per ton-mile basis. The obvious constraint to moving coal via barge is geographic location of coal mines and plants in relation to navigable waterways and access to river docks. In 2006, 161 million tons of coal had terminating transportation on river barges. Lake vessels are more constrained by geographic location of plants than river barges and were responsible for only 25 million tons of delivered coal in 2006. Fifty percent of the Illinois Basin’s and Central Appalachia’s deliveries, amounting to nearly 130 million tons, utilized trucks as their first, and in some cases only, form of transportation in 2006. Ocean vessels account also for some of the nearly 81 million tons of combined U.S. imports and exports.
Historically coal was sold under contracts that specified longer terms than they do today. The tendency in the industry has been to shorten contract length as other, potentially more reliable means of managing risk ( e.g., over-the-counter coal trading) have become more widely available and accepted. The reality is that over 85 percent of coal is delivered under contracts with lengths of one year or more. This dynamic is unlikely to change anytime soon because of the risk-management tool it provides to both producers and consumers.
Deeper and thinner seams, growing underground mine-safety costs, diminishing opportunities to consolidate reserves, falling productivity, and rising mining input costs ( e.g., labor, fuel, explosives, etc.) will cause production to decrease and increase mining costs in Central Appalachia. Trends in Central Appalachian coal production over the last 10 years are towards surface mining and away from underground mining in order to contend with cost issues associated with underground mining. With mountaintop mining under attack in the courts from environmentalists, there is an added degree of uncertainty about the future of some operations. Opportunities for companies to capitalize on potential synergies and the pressure from low prices and rising costs—with some producers particularly exposed—provide room for ongoing consolidation of operations, especially in