# Presentation: 891529

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

**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
- 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?

- 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

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

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

## 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

## 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.

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

**Source: Annual Energy Outlook 2004, January 2004**

## U.S Coal Vital Statistics, 2001-2004 

**Source: Quarterly Coal Report, September 2004**

## 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.

## Recent Coal Price and Supply Issues U.S. Coal Imports and Exports Survey Data

**Source: Quarterly Coal Report, September 2004**

**Imports**

## 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

## U.S. Coal Production - Rebounding

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

**Source: Short Term Energy Outlook, October 2004**

## Observations . . .

- 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

## Recent Coal Prices and Supply Issues Recoverable Reserves at Operating Mines

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

## Observations . . .

- 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

## Observations . . .

- 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

## Observations . . . Seven-Month U.S. Coal Exports to Asia, Africa & Oceania, 2004 vs 2003

**Source: National Mining Association, September 2004**

**Jan-July 2004**

**Jan-July 2003**

## Observations . . .

- 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

## Observations . . .

- 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

## Looking Forward

- 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.

## Looking Forward . . .

- 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

## Looking Forward . . .

- 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

## EIA Integrated Energy Forecasts -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

## Preliminary Winter Weather Forecast, Released 10/06/2004

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

## Integrated Energy Forecasts -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

## Integrated Energy Forecasts -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%

## Integrated Energy Forecasts -U.S. Coal Demand

**Source: Short Term Energy Outlook, October 2004**

## Integrated Energy Forecasts -Total Natural Gas Demand Growth Patterns

**Source: Short Term Energy Outlook, October 2004**

## Integrated Energy Forecasts -Total U.S. Electricity Demand Patterns

**Source: Short Term Energy Outlook, October 2004**

## Long-Term Energy Projections (to 2025)

- 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

## Long-Term Energy Projections Coal Production by Region, 1970-2025 with Long-Term Projections (million short tons)

**Long-Term Energy Projections ****Coal Production by Region, 1970-2025 with Long-Term Projections (million short tons)**

**Source: Annual Energy Outlook 2004, January 2004**

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

**Source: Annual Energy Outlook 2004, January 2004**

## Long-Term Energy Projections U.S. Coal Imports and Exports, 2002 and Projections to 2010 and 2025

**Million Short Tons**

**Source: Annual Energy Outlook 2004, January 2004**

## Long-Term Energy Projections Coal Mining Labor Productivity, 1990-2025  (short tons per miner per hour)

**Source: Annual Energy Outlook 2004, January 2004**

## Future Pressures for Higher Coal Prices

- 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

## Future Pressures for Higher Coal Prices

- 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

## Contact EIA for further information:

- Richard F. Bonskowski,             202-287-1725
- _[richard.bonskowski@eia.doe.gov](mailto:richard.bonskowski@eia.doe.gov)_
- EIA’s National Energy Information Center, 202-586-8800, _[infoctr](mailto:infoctr@eia.doe.gov)__[@eia.doe.gov](mailto:infoctr@eia.doe.gov)__** **_
- EIA Website:  **  **http://www.eia.doe.gov/