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Central App Met Market
Session II of the 2006 Spring Meeting of the West Virginia Coal Mining Institute and West Virginia Coal Association began with a keynote address given by Michael P. Zervos, President and CEO, United Coal Company, Scott Depot, West Virginia entitled The Central Appalachian Metallurgical Coal Market: Our Cloudy Crystal Ball.
Zervos began with an outlook on Central Appalachia where total coal production has dropped 60 million tons between 1997-2003. Meanwhile, mining costs in the eastern U.S. have increased between 9 and 23%.
There have been a number of recent activities with regard to major coke and coal producers. Alpha has shifted more coal into the met market opening the Cucumber Mine in Pennsylvania. Arch has more met sales from Pardee/Mingo Logan. CONSOL Energy indicates that VP 8 will deplete in 2006 and recently there was the Buchanan hoist problem. ICG is opening the Triangle Reserve. At Drummond, Shoal Creek was idled and the company is opening strip operations. J.W.R. has depleted No. 5 Mine and is expanding No. 7 Mine. Massey Energy is opening Guyandotte. Peabody Energy has extended the Harris life and is developing the new Black Stallion. Pinnoak has got Pinnacle at full production rate and United Coal is expanding its operations.
Zervos outlined the new and potential high vol met coal mines beginning with high vol mines. Arch Coal is opening Laurel Mountain; Bluestone has reopened Coal Mountain; Pittston has potential at Buffalo; and United has opened Carter Roag. Most new production potential is due to switching some marginal mines back to steam. With regard to mid vol mines, ICG is reopening Big Creek; Greenbrier Smokeless (Bill Turley) is opening a Greenbrier County underground operation; Mid-Vol Leasing (Dick Preservati) is expanding Low/Mid-Vol surface mine production; WV Mid-Vol is opening Peach Tree in Wyoming County; and United is expanding the Wellmore operations. There are also developments at low vol mines. ICG is planning to open Triangle; CAM is reopening Beckley seam mine; Massey is reopening Guyandotte; CONSOL is looking at VP 1 or VP 3; and United has acquired and is expanding the old Eastern operations White Mountain.
There is stable projected U.S. metallurgical coal coke plant consumption as shown in Figure 1. Domestic steel production has also been relatively static with production in 1995 and 2005 being about 92 million metric tons. U.S. coking coal sales to Canada are down 50% over the past decade to 2.9 million tons in 2005. New U.S. coke ovenís and capacity are now on hold due to low Chinese coke prices, but thereis new coke potential such as South Chicago 950,000 tons, Sun-Haverhill 2 550,000 tons, Sun-Johnstown 1,750,000 tons, all totatling 3,250,000 tons. With regard to export coking coal demand, east coast met exports fell by 28 million tons in the period 1997-2002 as shown in Figure 2. Gulf coast met exports have dropped 5 million tons since 1993. In 2005, Mobile exports were 4.7 million tons and New Orleans practically zero. Meanwhile, there has been a huge increase in global steel consumption. Since 1995, with noteably Chinaís consumption increasing threefold, global steel consumption has gone from about 700 million metric tons in 1995 to about 1,100 million metric tons in 2005.
Western Europe is the most significant consumer for U.S. coking coals. With a return to Asian shipments in 2003, the U.S. may drop out again with increased Australian and Canadian supply. There is quality depletion as Central App reserves deplete in more difficult conditions not suitable for longwalling. True mid-vol seams are not producing enough for export cargos. One of the strengths is that U.S. coals have premium met qualities over Australian coals. There are a number of international competitors. Australia is the largest threat to U.S. coals in western Europe with 81 million metric tons hard coking coal exported in 2005. Canada exported 26.2 million metric tons in 2005 and will remain in the international market. By comparison the U.S. is third. Russia has potential to be a significant player in the international market and may possibly overtake the U.S. as the third largest met exporter. Poland is Europeís only exporter of coking coal at 2.6 million metric tons in 2005 and may need its coal for domestic coke making in the future.
With regard to the domestic steam coal market outlook, coalís dominant market share will continue as shown in Figure 3. The Energy Information Administration forecasts that by 2030, 1,502 million tons of coal will be consumed for electricity generation. At the end of last year generation fuel costs were running approximately per million Btu natural gas $9.84, petroleum liquid $8.79, coal $1.56, and petroleum coke $1.17. In March 2006, average weekly spot prices were about Central App $58, Northern App $45, Illinois Basin $43, Uinta Basin $37, and PRB $15.
Zervos gave a forecast of U.S. metallurgical coal prices. The average cost of metallurgical coal priced at coke plants and export docks is shown in Figure 4. A domestic met coal price forecast including 2% escalation is shown in Figure 5. Domestic prices maintain a premium over export pricing with pricing being very bullish for high quality coal and export met coal price forecast including 2% escalation is shown in Figure 6. This forecast was from an April Hill & Associates report. Export prices will stay high compared to historic levels.
In summary, Zervos said that met coal prices are expected to drop below the market peak in 2004-2005 but remain strong through the end of the decade. Export prices will trail domestic prices due to a global oversupply led by Australia. Coal producers should continue to see more interest from the steel companies for the 3-5 year term business. The long term forecast is cloudy, but pricing for high quality metallurgical coals will not return to pre-2004 levels due to diminishing Central App coal reserves and significant cost inflation in most U.S. coal mines. If there are any interruptions, such as a major mine shutdown causing a blip in the Central Appalachian supply, that could significantly impact the pricing by $5-10 per ton.
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