Coal faces more uncertainty than any other base-load generating source. Two new factors, hitherto irrelevant to the U.S. industry, will shape future generation investment—imports of liquefied...
Coal Sets Sail
Global markets affect domestic prices, exports and infrastructure.
the export market. However, if the price drops closer to $105/ton, many of these same producers will be priced out of the market. This assumes current transportation rates remain steady, which is a very restrictive assumption, particularly when it comes to Atlantic vessel rates, but necessary for this analysis.
The statement that higher returns are being made by exporting coal can be proven by examining recent U.S. import and export data. Based on monthly coal imports and export data gathered from the U.S. Census Bureau, it’s apparent that producers are taking increased advantage of the export opportunity. The major increases are obvious in exports over the previous years’ levels that occurred during the end of 2007 and into 2008 (see Figure 3) .
Recent jumps in the tons of U.S. coal exported are very significant. U.S. exports were an average of 34 percent higher during the fourth quarter of 2007, compared to the fourth quarter of 2006, while exports during the first quarter of 2008 were 43 percent higher than the first quarter one year prior.
Major increases in exports could spur development of infrastructure necessary for exports, both in regards to export terminals, as well as transportation infrastructure to reach those terminals. However, there are a number of variables that come into play, such as current export capacity, and perhaps more important, investor returns. Current absolute export terminal capacity for seaborne coal is estimated to be 131 million tons a year. However, it’s unlikely that the entire 131 million tons of capacity currently is available. Based on recent export volumes and historical capacity utilization rates, an estimated 70 million tons of export terminal capacity actually is available in 2008. The difference arises because terminal operators very likely have shuttered equipment or altered use profiles. Rail infrastructure also has been shifted away from coal exports due to underutilized capacity.
Take for example the total 2007 coal exports from the four major terminals that supply U.S. coal to European countries (see Figure 4) . When total exports are broken out into the higher-valued metallurgical coal and lower-valued thermal (or steam) coal, and looking at total potential export capacity for that terminal (based on historical maximum coal exports), it is apparent that these terminals recently had the capacity to export more tonnage. Much of this capacity likely still is available or could at least be readied while the market still is hot.
With 2007 seaborne exports reaching 40 million tons and more expected in 2008, it is plausible that the United States could reach its maximum export capacity. This does not ensure capital investment in areas that would benefit U.S. coal exports, however. As global supply issues begin to subside, global prices will fall. If prices drop to levels that force U.S. producers out of the major export markets as discussed previously, then investments in export areas may not be utilized in a way that provides reasonable returns.
Railroads and owners of export terminals won’t make large investments unless they’re basically assured complete utilization and thus guaranteed returns. If sufficient returns on