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Autumn 2004, the Outlook for Eastern Coal Demand, Supply, and Prices Rich Bonskowski Energy Information Administration Presented at TVA Fall Industrial Conference Nashville, Tennessee, October 14, 2004 Agenda What is EIA and what does it do? Recent coal prices and supply issues

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Autumn 2004 the outlook for eastern coal demand supply and prices l.jpg

Autumn 2004, the Outlook for Eastern Coal Demand, Supply, and Prices

Rich Bonskowski

Energy Information Administration

Presented at TVA Fall Industrial Conference

Nashville, Tennessee, October 14, 2004


Agenda l.jpg
Agenda

  • What is EIA and what does it do?

  • Recent coal prices and supply issues

  • Observations about coal prices and supplies

  • Looking forward

  • EIA integrated energy forecasts

  • U.S. coal markets in the future

TVA Cumberland Coal-Fired Plant


What is eia l.jpg
What Is EIA?

  • Statistical agency of U.S. Department of Energy, created in 1977

  • Provides policy-independent data, forecasts, and analyses

  • DOE approval not required for EIA products; substance of technical reports independent of any other U.S. Government approval


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EIA Average Weekly Coal Commodity Spot Prices (A Frequent Cause for Concern)

Source: Coal News and Markets Report & Platts Coal Outlook


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EIA Products

  • Integrated Energy Forecasts, short term and extended

  • Data reports - Petroleum, Natural Gas, Coal, Electricity, Nuclear, and Renewable Energy

  • Analysis reports on fuel-specific or hot-issue topics

  • Service reports on alternative scenarios, for Congress, other Federal agencies


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Recent Coal Price and Supply Issues

  • Coal demand has increased, but not enough to account for recent supply problems.

  • More importantly, coal demand has been inconsistent—the major buyers were unable or unwilling in 2003 and early 2004 to replenish inventories.

  • Why? Because coal prices had been inching down for so long, buyers were reluctant to commit too soon and miss the even lower prices that were sure to come.


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U.S. Coal Markets, Past and FutureAverage Mine Price of Coal, 1990-2025, with Long-Term Projections (2002 dollars/short ton)

Source: Annual Energy Outlook 2004, January 2004


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U.S Coal Vital Statistics, 2001-2004

Source: Quarterly Coal Report, September 2004


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Recent Coal Price and Supply Issues

  • Uneven demand was exacerbated by China’s unreliable trading practices in 2003/2004.

  • Unmet deliveries of Chinese coal and metallurgical coke, and low $U.S. exchange rates, raised demand for U.S. coal in Japan, Korea, Taiwan, India, and other countries.


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Recent Coal Price and Supply IssuesU.S. Coal Imports and Exports Survey Data

Imports

Source: Quarterly Coal Report, September 2004


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Observations about Coal Markets and Prices (from EIA data, industry analysts and newsletters)

  • Coal is in short supply, including in the Southeast, but supplies are starting to improve for 2005

  • Thermal coal prices could subside in 2005, but do not expect to see 2003 prices

  • Metallurgical coal prices expected to remain high in 2005, decline some in 2006

  • Coal demand is expected to grow


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U.S. Coal Production - Rebounding industry analysts and newsletters)

Production forecast to rise 3.4% in 2004, 3.5% in 2005

Source: Short Term Energy Outlook, October 2004


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Observations . . . industry analysts and newsletters)

Why coal supplies are short –

  • Bad timing: higher than usual rate of mines closing (2003-2005) in the East due to “bad geology” or reserve depletion; several major mines suspended mining due to hazards

  • More bad timing: deferred demand – many big customers (electric power generators) delayed full replenishment of coal inventories in 2003 and early 2004


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Recent Coal Prices and Supply Issues industry analysts and newsletters)Recoverable Reserves at Operating Mines

Source: Annual Coal Report, September 2004, and previous versions


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Observations . . . industry analysts and newsletters)

Why coal supplies are short –

  • Economics – chronic low contract coal prices drove six sizable bituminous producers to bankruptcy protection (2002-2004), some production lost, some contracts canceled or renegotiated

  • Financial - banks have declined new loans to mines based on the record of low coal prices, growing mining costs, low profits, multi-year permitting processes, and past bad debts with merchant generators


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Observations . . . industry analysts and newsletters)

Why coal supplies are short –

  • Externalities: Demand in international Atlantic market captured some South American coal being eyed by coastal southeastern U.S. utilities.

  • Externalities: China reneging on coal and met coke exports in late 2003 and 2004 and disruptions in Australian exports sent Japan, India, Korea, and others to U.S. for coal; diverted 6.5* mmst to exports

    * 5.5 mmst exports + 1.0 mmst steam coal-met coal conversion loss


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Observations . . . industry analysts and newsletters)Seven-Month U.S. Coal Exports to Asia, Africa & Oceania, 2004 vs 2003

Jan-July 2004

Jan-July 2003

Source: National Mining Association, September 2004


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Observations . . . industry analysts and newsletters)

Why coal supplies are short –

  • Permitting: Due to 2004 decision in valley fill lawsuit, Corps of Engineers stopped processing multiple permits under National criteria, causing delays in WV region

  • Skilled labor: engineers and miners with needed technical skills left for better pay and conditions in 1990’s; most not returned

  • Skilled labor: other experienced miners are retiring; younger generation left coalfields


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Observations . . . industry analysts and newsletters)

Why coal supplies are short –

  • Reduced WV coal truck weight limits, strict fines, and higher license fees in 2004 severely curtailed regional deliveries, especially to river docks

  • Because of increased national demand for trains in improving economy, recent rail employee attrition, and producers diverting coal to export docks, coal deliveries chronically delayed in 2004


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Looking Forward industry analysts and newsletters)

Thermal spot coal prices could subside –

  • The 2002-2004 coal producer bankruptcies are winding down, best properties being acquired by better-financed companies

  • Customers starting to believe higher coal prices are real, signing $40-$44 contracts

  • High spot prices do affect baselines for new contracts, less effect on long-term averages

  • Backwardation* in forward prices

  • Several new mines in the East are opening, or old mines reopening, in late 2004

*Backwardation describes a market in which spot prices exceed forward prices. Typically, forward prices increase in energy markets. Backwardation in prices usually corresponds with an immediate shortage.


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Looking Forward . . . industry analysts and newsletters)

Metallurgical coal prices could subside later –

  • International met coal prices have been what the traffic will bear, certainly as high as $150 per metric tonne; in U.S., expect $70 and $80/short ton f.o.b. mine

  • International demand continues high, e.g., Massey in ’03 shipped 5 mmst of met coal, expects 7-8 mmst in ’04, 8-10 mmst in ’05

  • Suppliers have responded: low-vol “swing” mines, Pinnacle mine back on line, new mines in Appalachia and Canada


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Looking Forward . . . industry analysts and newsletters)

Coal demand projected to grow –

  • EIA projects coal consumption will grow by 3.4% in 2004 and another 3.5% in 2005

  • A colder-than-normal winter expected in Southeast

  • Interest in coal hedge funds growing - trader positions assume oil prices and natural gas prices will stay high and even interruptible gas supplies may be insufficient for expanding electricity generation


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EIA Integrated Energy Forecasts - industry analysts and newsletters)For Example, Winter Fuels Forecast, Released 10/06/2004, Covers October 2004 – March 2005:

Though targeted to residential fuels, gives important insights:

  • Higher prices for natural gas, heating oil, and electricity

  • Colder winter in Southeast

  • At start of season natural gas inventories slightly ahead of last year


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Preliminary Winter Weather Forecast, Released 10/06/2004 industry analysts and newsletters)

Source: NOAA U.S. Winter Outlook, October 6, 2004


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Integrated Energy Forecasts - industry analysts and newsletters)EIA Winter Fuels Forecast, Released 10/06/2004

  • Total electricity demand to increase due to economic growth, plus weather

  • Coal-fired generation to grow 2.6% over last winter

  • Coal consumption to increase by 12.7 mmst over last winter

  • Power-sector coal stocks on October 1 estimated as 5.3 mmst lower than last year


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Integrated Energy Forecasts - industry analysts and newsletters)EIA Winter Fuels Forecast, Released 10/06/2004

  • Winter coal production, however, projected to be 32.1 mmst higher than last year

  • Though spot coal prices are up 60% (Big Sandy), average prices to electric utilities include long-term contracts, projected to rise 3.2%


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Integrated Energy Forecasts - industry analysts and newsletters)U.S. Coal Demand

Source: Short Term Energy Outlook, October 2004


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Integrated Energy Forecasts - industry analysts and newsletters)Total Natural Gas Demand Growth Patterns

Source: Short Term Energy Outlook, October 2004


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Integrated Energy Forecasts - industry analysts and newsletters)Total U.S. Electricity Demand Patterns

Source: Short Term Energy Outlook, October 2004


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Long-Term Energy Projections (to 2025) industry analysts and newsletters)

  • Electricity demand will rise

  • Natural gas prices in real dollars will rise

  • Coal mining productivity will improve further, keeping coal prices relatively low

  • Emission caps will shift even more demand to the West

  • Industrial coal demand and coal exports decline, coal imports rise


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Long-Term Energy Projections industry analysts and newsletters)Coal Production by Region, 1970-2025 with Long-Term Projections (million short tons)

Source: Annual Energy Outlook 2004, January 2004


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Long-Term Energy Projections industry analysts and newsletters)Coal Production by Sulfur Content, 2002, 2010, and 2025 (million short tons)

Source: Annual Energy Outlook 2004, January 2004


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Long-Term Energy Projections industry analysts and newsletters)U.S. Coal Imports and Exports, 2002 and Projections to 2010 and 2025

Million Short Tons

Source: Annual Energy Outlook 2004, January 2004


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Long-Term Energy Projections industry analysts and newsletters)Coal Mining Labor Productivity, 1990-2025 (short tons per miner per hour)

Source: Annual Energy Outlook 2004, January 2004


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Future Pressures for Higher Coal Prices industry analysts and newsletters)

  • New mines in Appalachia will require greater investment—mountaintop mines, deeper mines, thinner beds; longwall reserves dwindling

  • EIA forecasts slowly increasing natural gas prices, even with 4 new LNG terminals and more unconventional and domestic gas from Alaska

  • Dominant coal companies are determined to be more consistently more profitable

  • Down to four major railroads; their investors expended a lot in mergers and infrastructure and assert that increases in revenue are overdue


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Future Pressures for Higher Coal Prices industry analysts and newsletters)

  • U.S. economy improving

  • China will continue to curtail exports and tie up ocean shipping for a year or more

  • Recent rail congestion and delays a trend?

  • Farther out, coal synfuel tax advantage due to expire at the end of 2007

  • Controversial EPA regulations for mercury and fine particulates


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Contact EIA for further information: industry analysts and newsletters)

  • Richard F. Bonskowski, 202-287-1725

  • [email protected]

  • EIA’s National Energy Information Center, 202-586-8800, [email protected]

  • EIA Website: http://www.eia.doe.gov/


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