Tuesday, June 24, 2008

Coal firms find it hard to meet increased demand, especially in Appalachia; spot prices $140, $300

U.S. coal producers are struggling to meet increasing demand because of an extensive permitting process, insufficient investment and a scarcity of skilled miners, which results in tight supplies and high prices, reports The Wall Street Journal.

"The underlying industry-wide issues are compounded by severe floods in the Midwest, which have stranded barges full of coal and submerged railcars used to haul coal," Kris Maher writes. "It isn't clear what impact those interruptions will have on supplies and prices." Vic Svec, a senior vice president of St. Louis-based Peabody Energy Corp., said the floods will take several million tons of coal offline.

Industry authorities have predicted U.S. demand for coal to surpass supply by 15 million tons this year, primarily because of increased exports and government restrictions. "Despite the strong margins that coal companies are seeing, the supply response has so far been limited," said Paul Forward, a coal analyst with the brokerage Stifel, Nicolaus & Co. "I think it's probably a couple of years worth of time where these markets stay tight." David Khani, director of research at FBR Capital Markets in Arlington, Va., estimated that up to 40 million tons of production is being delayed by environmental permitting and new safety regulations. "While 40 million tons doesn't seem significant given that the U.S. produced 1.15 billion tons of coal last year, even small shifts in supply can have a big impact on price," because so much production is locked up in multi-year contracts, Maher writes. Another contributing factor keeping the industry from taking full advantage of the demand for coal is its reluctance to buy new machinery and develop new mines when prices were lower. "Until these higher prices, the industry has not been investing," said Dan Roling, chief executive of Knoxville-based National Coal Corp.

"The supply constraints are most acute in Central Appalachia, which accounts for 25 percent of the coal mined in the U.S. but has a greater impact on market conditions because coal from the region generates more heat per ton than coal from other areas," Maher writes. "The spot price of Central Appalachian coal sold to both utilities and steelmakers has tripled in the past year, with "steam coal" going to utilities rising to as much as $140 a ton from $44 a ton, and metallurgical coal for steelmakers to $300 a ton, from $100 a ton. Coal production in the region declined 2.3 percent through early June compared with the same period last year," according to an analysis by Forward of U.S. Energy Information Administration data.

"In general it's hard in the short run in our business to dramatically increase production," said Thoman Hoffman, a spokesman for Pittsburgh-based Consol Energy Inc., the nation's fifth-largest producer. "It's not like we have a bunch of idle production and we can just turn a key and out it flows like water through a pipe." Still, Consol expects a 10 percent increase in production this year, to 70 million tons, from its 16 mines in Appalachia and one in Utah.

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