Steady again, as new paradigm takes hold.
Andy Roberts is a Principal with Platts Research and Consulting.
A little more than a year ago, prices for virtually all qualities of coal were high and heading higher. But in 2001, coal prices peaked and began to fall. By spring 2002, most of the price increase of the previous 18 months had been given back.
So what happened? First of all, demand slackened. The first vigorous winter in three years (2000/2001) gave way to a moderate spring and summer, and a more moderate fall and early 2001/2002 winter. Demand for coal weakened as temperatures moderated.
Then came a national recession and Sept. 11. Inventories were quickly lowered in favor of increased production, electricity demand slowed, and layoffs accelerated.
Natural gas inventories started to grow in the summer of 2001. High levels of natural gas inventories helped keep gas prices low and contributed to the fall in coal prices. Finally, coal production grew during 2001 in a typical, but delayed, free-market response to high prices.
New coal price levels are down, but above the prices realized in the 1990s. Perhaps it can be demonstrated that the supply of coal is much more in line with its demand, and that coal mines are producing at levels much closer to aggregate mine capacity.
So where does that possibility lead the market? In the next year or two, other than for short periods, coal prices will likely remain at levels reflecting full mining costs, including reasonable rates of return. A long-term return of prices to sub-full cost levels would require an unlikely scenario: the combination of a long period of low demand, an early end to regional production problems and the elimination of transportation constraints-all in addition to a long period of low natural gas prices.