Warning: Declaration of action_plugin_safefnrecode::register(Doku_Event_Handler &$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/safefnrecode/action.php on line 14

Warning: Declaration of action_plugin_blog::register(&$contr) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/blog/action.php on line 0

Warning: Declaration of action_plugin_blockquote::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/blockquote/action.php on line 0

Warning: Declaration of action_plugin_include::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/include/action.php on line 0

Warning: Declaration of action_plugin_popularity::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/popularity/action.php on line 0

Warning: Declaration of action_plugin_redirect::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/redirect/action.php on line 0

Warning: Declaration of action_plugin_captcha::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/captcha/action.php on line 0

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: Declaration of Doku_Renderer_metadata::table_open($maxcols = NULL, $numrows = NULL) should be compatible with Doku_Renderer::table_open($maxcols = NULL, $numrows = NULL, $pos = NULL) in /home/public/dw/inc/parser/metadata.php on line 24

Warning: Declaration of Doku_Renderer_metadata::table_close() should be compatible with Doku_Renderer::table_close($pos = NULL) in /home/public/dw/inc/parser/metadata.php on line 24
US coal market summary -- normalization likely [ClearOnMoney]
Top

Site

About
Contact

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Sitemap

Profile

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Trace:
US coal market summary -- normalization likely

Reference

Main
Updates
Schedule

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Commentary

US coal market summary -- normalization likely

12 Sep 2012 by Jim Fickett.

This post pulls together and summarizes commentary to date on US coal markets. The main conclusions are (1) recent damage to coal demand has been due mainly to cheap gas, but would have been done anyway, in the longer term, by regulation; (2) further growth in exports is possible but should not be relied upon; and (3) any further damage from cheap gas will be temporary. In sum, then, security analysis can reasonably be based on something close to current demand for the longer term.

Global backdrop - strong demand will continue

The focus here will be on the US, but it helps to start with the global picture. If you thought (or hoped) that the world was giving up coal because it is a dirty fuel with high carbon emissions, you are in for a disappointment. Here is an update of a graph from an earlier post (Coal gains in share of energy mix over medium term), showing the share contributed by each source of energy globally (based on the BP statistical review):

The good news is that the share of renewables is growing very rapidly, but unfortunately from a very low base. The share of coal is the second highest, and also growing strongly. And although it is true that much of the growth comes from China (155% growth since 2001) and India (104% growth), the rest of the world is not really moving strongly away from coal. Highly green Germany has only succeeded in reducing coal consumption by 9% over the last decade, and consumption in Europe and Eurasia as a whole is down 4%.

Coal plays a large role because it is cheap and abundant, and I think we can count on world demand remaining strong (The global picture for coal -- rapidly growing consumption of a cheap, abundant resource). China's growth has indeed been unsustainable, and I am not saying that coal consumption will grow like Topsy in the future. But it's not going to fade away, either – strong global demand for a long time yet is very likely.

Short detour on units

Coal is usually measured in tons, but there are several different kinds of tons. A “short ton” (the default in the US) is 2000 pounds. A metric ton, or “tonne” (the default where the metric system is commonly used), is 1000 kilograms, or 2205 pounds. And a long ton (officially obsolete but sometimes still used in countries of the former British empire) is 2240 pounds. Often news sources ignore the distinction and it is impossible to tell which unit is being used. Fortunately, although a 12% difference is a big deal to a coal miner, a shipper, or a trader, it often matters relatively little to the long-term investor, given that prices for both coal and shipping can easily double or halve over time.

Do not count on US exports growing

It is common to see predictions of US coal production rising to meet emerging market demand (especially, of course, in China). But a point often missed in these analyses is that the cost of transporting coal long distances is often a large fraction of the final delivered price, so it is difficult to compete in markets far away. There follow two examples.

In the first example all the particular prices are far out of date – the analysis was done in 2008 – but it illustrates well the nature of the overall calculation.

The price potential of Central Appalachian Basin (CAAP) coal into the European thermal coal market depends on the sum of the pieces: the coal, transportation, and handling costs. The discussion below builds up this approximate pricing from Europe back to the coal mine in the CAAP region to help evaluate the potential of this coal’s possibility into Europe. This is commonly referred to as “net back” in the coal industry.

Ocean freight rates between the U.S. East Coast and Europe are now ~$36/tonne ($32.65/ton)

Rail rates between the CAAP coal mine and the U.S. East Cost terminal, inclusive of the coal railcars and fuel surcharges are currently $22/ton.

Terminal handling fees are ~$3.00/ton.

Using a $115.75/tonne ($104.99/ton) into Europe for the API-2 for calendar 2008 delivery (at the time of this writing), normalizing for heat content differences between the two products (11,270 Btu/lb versus 12,500 Btu/lb) and weight measurement differences (metric tons and short tons) this nets back to $58.79/ton at the CAAP mine.

So $60/ton in Appalachia corresponded to $105/ton in Europe, due to shipping and handling.

To take a more up-to-date example, just last week an analyst at Howard Weil Inc., an energy investment firm, compared the cost of electric generation from coal and gas. Coal which costs only $10/ton to produce in Wyoming costs, on average, $25 to ship to the power plant, and so is only slightly cheaper per million BTU than gas. When one factors in that the average gas power plant is 25% more efficient than the average coal plant, that makes even the extremely cheap Wyoming coal uncompetitive (at current gas prices).

The European market is fairly stable, and currently depressed. What some people pin their hopes on is greatly increased US exports to emerging markets, especially China. For China in particular, the arguments against this scenario are:

  • Transport from US mines (about $40-$50/ton for the ocean voyage, plus something in the neighborhood of $20/ton for the train to the coast) is much more expensive than transport from Australian or Indonesian mines
  • Currently ocean transport costs are extraordinarily low (about half the pre-crisis rate), due to a glut of dry transport ships ordered during the boom; when this situation normalizes it will strengthen the advantage of Indonesia and Australia
  • China produced more coal than it consumed in 2010 and 2011; it only recently became a net importer, and this may reverse if growth slows further

Note that debunking the bullish case for growing exports to China does not imply that current exports are likely to shrink greatly. Most current exports are to markets where the US is, indeed, competitive.

The overall picture is more than a little complicated. For example, coal companies are currently trying (against staunch environmentalist resistance) to build coal export terminals on the US west coast – which would help to lower transport costs to China. So it is possible that US exports will continue to grow. If so, that only strengthens my main overall thesis, which is that the US coal market is not going to suffer a great deal of further, permanent damage. But I am not going to count on exports improving, and I think one should only take a positive stance on US coal if one sees the domestic market as likely to recover.

In the domestic market, the main issue is the price of natural gas

Some people see multiple headwinds for coal extending far into the future. I think, to the contrary, that the main problem for coal is cheap natural gas, and that the price of gas will likely rise substantially before too long.

To summarize the argument from the post two days ago (Coal has probably already seen the worst):

(1) A careful, detailed study from 2010 predicted that stricter environmental regulation, one of the biggest threats overhanging coal power plants, would result in the closure of some older, smaller, less competitive plants, where upgrading to new standards would be uneconomic, and that these closures would result in coal demand falling about 11% by 2015. If we use the average of the boom-time peak demand and the following depressed recession demand as a baseline, coal demand has already fallen 14%.

(2) Another study from the electric power industry painted one very negative scenario (probably too negative, according to the Congressional Research Service) in which the share of coal in electric generation would fall to 36% of the total. Last June the share of coal had already fallen to 34%.

(3) The competition from cheap natural gas probably threatens many of the same plants – namely those that are older and less efficient – threatened by tougher regulation. So it seems likely that cheap natural gas has, in fact, already done the damage to coal that was feared from environmental regulation.

(4) Cheap natural gas may do yet more damage. Yet even if there are some further plant closings, and even if there is some non-overlap between plants closed by cheap gas and plants to be closed by regulation, it seems likely that, when electricity generated from coal is once again considerably cheaper than electricity generated from gas, demand will rise to current or higher levels.

Conclusion

It is hard, perhaps impossible, to predict timing. So although I think the coal market will rebound before too long, a better conclusion to take away is that

(1) Much of the decrease in coal demand we've seen so far may be permanent – although the damage was done by temporarily cheap gas, it would have been done later by permanent regulation. On the other hand,

(2) If things get worse, it will be due only to temporarily cheap gas, and the damage is unlikely to be permanent.

So in other words, current demand is somewhere near the long-term norm, and worries about further big declines in coal are overdone.