Crippling snowstorms in China, floods in Australia and blackouts in
South Africa might seem like problems a world apart. But they’re closer
than you think.
Since Jan. 1, crises such as these have strained coal markets already
stretched thin by soaring Asian demand, and the impact is reverberating
to mines in West Virginia and Wyoming, which are being counted on to
fill the void.
St.. Louis Post Dispatch - Saturday, March 8, 2008
Crippling snowstorms in China, floods in Australia and blackouts in South Africa might seem like problems a world apart. But they’re closer than you think.
Since Jan. 1, crises such as these have strained coal markets already stretched thin by soaring Asian demand, and the impact is reverberating to mines in West Virginia and Wyoming, which are being counted on to fill the void.
St. Louis-based Peabody Energy Corp. shipped more coal overseas in the first six weeks of this year than it did all of last year, said Chief Executive Gregory H. Boyce.
"The globe — and we look at the whole globe — is short of coal for the needs of demand," Boyce said in an interview. "That is now pulling huge amounts of exports out of the U.S."
The trend is evident at the Port of Hampton Roads in Newport News, Va. — the nation's busiest coal port — where shipments could rise 50 percent this year to 42 million tons, said David F. Host, president of T. Parker Host, a shipping agent in Norfolk, Va.
Shipping terminals are dusting off idle equipment and adding staff in a scramble to keep up, and railroads are shifting equipment and employees and buying and leasing more cars to get coal from mines to the coast.
At Dominion Terminal Associates coal shipping facility in Newport News, Va., one of three coal terminals at the port, the pickup in export demand was unexpected, said President Charles Brinley.
"This is one of the most sudden turnarounds in my memory," Brinley said. "We expected to do about 5 million tons in 2007 as the year got under way and all of a sudden in August it really ramped up without a lot of warning."
Coal shipments from the
terminal, 30 percent owned by Peabody and 17 percent owned by Creve Coeur-based Arch Coal Inc., rose from about 5 million tons in 2006 to 7.5 million last year. Shipments could reach 16 million tons in 2008, he said.
Other ports, too, are seeing a pickup in activity. They include American Commercial Lines Inc.'s coal transfer terminal just north of downtown St. Louis, where coal from Western states arrives by rail and is loaded onto barges for shipment out of New Orleans.
EXPORT FACTORS
The export boom is being driven by a confluence of events — booming demand in Asia and supply disruptions and transportation bottlenecks in other coal-exporting nations, executives and analysts say.
Snowstorms in China prevented shipments of coal to power plants, resulting in blackouts in some provinces that led the country to suspend all coal exports for at least two months.
Australia, the world's biggest coal exporter, faces rail and port congestion as mines ramp up output. And torrential rains earlier this year flooded mines and forced many coal producers to temporarily halt production and declare force majeure on some contracts — meaning they couldn't fulfill the terms.
It's also being driven by a weak dollar that's making U.S. coal cheaper for overseas buyers.
"All of the sudden, the world has sort of (awakened) and realized that the traditional supply and demand flows have changed," said Steven F. Leer, chief executive of Arch, the nation's No. 2 coal producer.
The biggest factor is China. As recently as 2005, the country was among the world's biggest exporters, shipping 80 million tons of coal a year, mostly to Japan, Korea and other Pacific Rim countries. Last year, however, China became a net importer as its appetite for fuel to run power plants and steel mills outstripped the ability of domestic mines to produce it.
While coal-fired power plants in the U.S. are being delayed or cancelled because of concern about global warming, China is building a new plant every week to 10 days to feed its fast-growing economy. Last year, the country added 96 gigawatts of new coal-fired electric generation — the equivalent of Great Britain's existing coal fleet.
The impact of China's switch from coal exporter to importer is still being played out.
South Africa, traditionally a key supplier to Europe, is sending more coal to Asia, where the demand and price is greatest. Russia, another European supplier, is increasing reliance on coal so it can ramp up exports of more-valuable natural gas. And Europe, seeking to fill the void, increasingly is turning to the United States.
The shift in demand and trade patterns is being reflected in coal prices. Spot prices for coal from Wyoming's Powder River Basin and central Appalachia, the nation's biggest coal producing regions, have more than doubled since January 2007. And prices for hard coking metallurgical coal, the best coal for steelmaking, have tripled.
Stock prices of U.S. coal producers have risen almost as sharply. Peabody is up 49 percent in the last year; Patriot Coal Corp., spun off from Peabody in October, has gained 56 percent since it began trading; and Arch Coal Inc. has gained 67 percent.
IMPACT ON CONSUMERS
Consumers, meanwhile, should not be affected by the run-up in coal prices, said Robert Neff, vice president of coal supply and transportation for Ameren Corp.
St. Louis-based Ameren, which buys 41 million tons of coal a year, purchases coal up to five years in advance so it's less susceptible to price volatility.
"When the prices are low, we try to make bigger purchases and when the prices are high, we try to make smaller purchases, but we really never stop buying," Neff said. "You don't get the lowest cost, but you don't get caught in these spikes where the market blows out."
Ameren already has purchased all of its coal for 2008 and most for 2009. And while Neff agrees that coal prices are trending higher, he believes the current price spike is being caused by a "perfect storm" that's unlikely to persist.
If U.S. coal exports do reach 80 million tons, it would be the highest level a decade. But that's still well short of the record 109 million tons shipped in 1991.
In fact, the U.S. has long been a "swing supplier" to Europe when markets get tight, but previous booms — like the one in 1991 — have been short-lived.
DIFFERENT TIMES
This time it's different, and producers could have trouble supplying the needs, coal executives say.
Fifteen years ago, railroads and mines in Wyoming's Powder River Basin, the nation's biggest coal producing region, had excess capacity, so if an additional 5 million tons of coal was needed it could be brought online more easily. That's not the case anymore.
"Today, we're running pretty close to full capacity, so you really have to make significant infrastructure investments to have that extra capacity," Leer said.
If coal demand in China and India continues to grow at a feverish pace, the world will have a hard time keeping up.
Said Boyce: "If the pace of demand continues the way it has, it's going to take a number of years to catch up, which means we're going to have a very tight market."
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