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Coal Sets Sail

Global markets affect domestic prices, exports and infrastructure.

Fortnightly Magazine - August 2008

times. As more coal is exported, the European supply situation is rippling across the Atlantic to the United States: Supplies from traditional sources have been diverted to non-traditional customers, leaving U.S. supply constrained while demand shows no signs of slowing.

This has resulted in major price increases domestically. All five major U.S. coal-producing basins have seen average price increases since March, 2007, ranging from approximately 60 percent to over 200 percent. Coals being exported—CAPP and NAPP coals—are the coals seeing the most impressive price increases, while other coals have showed smaller, though still significant gains.

Due to Australia’s contribution of met coal to the global market, the global supply crunch also has impacted the met market. For the purposes of domestic pricing, one must take into account mines that might be referred to as “switch hitters.” These are mines that normally supply the domestic thermal coal market, but are able to sell their coal in the met market during times of high demand, despite coal qualities not being optimal for metallurgical purposes when supply is sufficient.

These switch hitters are subject to steam coal contracts that must be honored. However, some met coal currently is being sold at over $300/ton, much higher than “normal” levels. Given this scenario, switch hitters may earn higher profits if they sell their production into the met market. But contracts still must be honored, which means they’ll go into the U.S. spot market and purchase thermal coal to ship to their contract customers. This increases the demand for thermal coal in the U.S. spot market and helps buoy thermal prices to some degree.

Though the met market certainly has the ability to impact domestic thermal prices, the implications of the relationship between global supply and demand of thermal coal (and thus coal prices) and domestic U.S. coal prices are much more extensive. As global supply rebounds, ARA prices will drop. Domestic supply in the U.S. will increase due to a decrease in exports, as well as switch hitters returning to their traditional practices of supplying contract customers with normal production. The result will be a decrease in domestic prices. Thus, even as prices abroad decrease from current levels, the still-escalated price will continue drawing major exports from the United States. High-quality coal producers have tasted the high profit margins in the export market and only severe reductions in price will halt their willingness to sell in the Atlantic market.

Pricing Affects Exports

But how high do export prices need to be to support escalated levels of exports? Utilizing recent mine-cost capacity data, the availability of U.S. thermal-coal production capacity can be determined at varying price levels, and transportation costs associated with moving coal from eastern mines to export terminals can be estimated. For this analysis, the 2008 average Atlantic shipping rate was forecasted to be $34.39/ton, with an average 2008 rail rate of $25/ton to Eastern ports. Based on this analysis, it appears that if the ARA spot price is above $110/ton, then the vast majority of CAPP and NAPP producers profitably could market their coal in