USCoalMarketsHeller

8/2/2019 USCoalMarketsHeller

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US Coal Markets:

Looking Abroad

Presentation to:

Jackson Kelly Coal SummitLexington, Kentucky

By

Jamie Heller

April 15, 2011Hellerworx, Inc.

301-654-1980

[email protected]


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Agenda

Review of 2008 - Present Coal Market

Global Market Drivers

Key Drivers of Coal Price Volatility

Coal Transportation Changes

Closing Observations


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3

Review of 2008 - Present Coal

Market Movements


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4

US Coal Production, 2008 - Jan 22, 2011

Sources: 2008-2009 EIA data;

2010-YTD 2011 Doyle Trading Consultants estimates.

2008-2010 Totals(millions of tons)

Coa l Supply Re gion 2008 2009

2010 (DTC

est.)

2009-2010

%chg.

Cent ral A ppalac hia (CA PP ) 232 192 183 -4.7%

Northern A ppal ac hia (NAP P) 134 125 127 1.6%

Illinois Basin (ILB) 100 104 106 1.9%

Powder River Basin (PRB) 512 470 484 3.0%

Colorado and Utah 56 50 44 -12.0%

Other Regions 137 132 131 -0.8%

Total 1,171 1,073 1,075 0.2%


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5

Volatility of Coal Prices Has Increased

Dramatically

(2000 through late Feb 2011)


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6

Coal Price Spreads Are Unstable


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7

Summer 2008 Coal Supply Situation

No spare production capacity

US Central Appalachian region hitting

serious supply limits

Strong demand for export coal Australian coal mines flooded

Coal stockpiles low at eastern utilities

Railroad network congested and pricing

to match


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Summer 2009 Coal Supply Situation

Excess production in major basins

CAPP prices falling below production

costs

Export demand shrinking dramatically

Strong demand shifts in US marketdriven by FGD installations

Natural gas displacing coal

Stockpiles overflowing

Railroads experiencing major trafficdeclines


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9

Early 2010 Coal Supply Situation

Coal production levels close to

expected 2010 demand

Coal prices beginning to recover, but

still below expected long-term

equilibrium levels

2010 coal exports and imports expected

to be close to 2009 levels

Natural gas prices increasing as

economy begins to recover

Coal stockpiles still high

Aussie vessel queues but no price

spikes


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10

April 2011 Coal Supply Situation

Coal demand partially recovered from 2009 lows,

showing limits of natural gas displacement of coal.

Declines in CAPP and CO/UT coal production have

almost completely offset cautious expansions in other

regions.

Mining costs continue to increase, especially in CAPP

(impact of new environmental and mine safety

regulations, plus increased enforcement of newregulations)

Strong market for exports of metallurgical coal

Coal stockpiles built up during 2009 are being drawn

down

Service issues on some railroads as available crews,locomotives and railcars fail to keep pace with

recovery in demand


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11

Coal Supply-Demand Forecast

Doyle Trading Consultants Forecast of U.S. Coal Supply and Demand

(Feb 2011)(millions of short tons)

2006 2007 2008 2009 2010 2011CAPP 234 224 232 192 183 174

NAPP 135 131 134 125 127 129

ILB 95 96 100 104 106 111

PRB 489 497 512 470 484 493

Colorado/Utah 62 61 56 50 44 44

Other Regions 148 138 137 132 131 132

Total U. S. Coal Production 1,163 1,147 1,171 1,073 1,075 1,083

Consumption for Electricity Generation 1,027 1,046 1,044 937 981 1,001Coke Plants 23 23 22 15 20 22

Other Industrial Plants 60 57 55 45 48 50

Residential and Commercial 3 3 3 3 3 3

Total Domestic Consumption 1,113 1,129 1,124 1,000 1,052 1,076

Exports (Metallurgical Coal) 28 33 43 37 58 57

Exports (Steam Coal) 22 27 39 22 24 25

Total Exports 50 60 82 59 82 82

Imports 36 36 34 23 19 17

Net Exports 14 24 48 36 63 65

Total Demand for U.S. Coal 1,127 1,153 1,172 1,036 1,115 1,141

Coal Supply Surplus (or Deficit) 36 (6) (1) 37 (40) (58)

Sources: 2006-2009 EIA; 2010-2011 Doyle Trading Consultants estimates.


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12

Global Market Drivers


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Global Market Fundamentals: Large

Expected Increases in Coal Demand

According to the EIAs International Energy Outlook 2010, global

coal consumption is expected to grow 55% between 2009 and 2035

(an increase of about 4.2 billion short tons per year, from about 7.6

billion short tons/year currently to 11.8 billion short tons/year by

2035), with most of the increase occurring in China and India.

Demand for metallurgical coal will likely increase even faster.

Peabody Energy expects global steel production to increase 66%

between 2010 and 2020 (an increase of almost 900 million metric

tonnes/year), leading to a 33% increase in demand for metallurgical

coal (an increase of about 400 million metric tonnes/year) over this

ten-year period. Most of this increase is expected to occur in China

and India.


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14

US Steam Coal Exports 1991-2011


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US Coking Coal Exports 1991-2011


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16

Strong Growth in Asian Coal Demand

Expected to Continue Over Long Term


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Expected Coal Import/Export Trends

Exports of metallurgical coal from the U.S. increased by more

than 20 million short tons during 2010 (from about 37 million

short tons in 2009 to about 58 million short tons in 2010), and

may increase further during 2011 due to strong global demand

for, and tight global supplies of, metallurgical coal.

The Queensland Resources Council estimates that flooding in

the Australian state of Queensland earlier this year may reduce

total Australian coal production (including steam coal and

metallurgical coal ) by 30 to 50 million metric tonnes during

2011.

In Europe: German nukes shutdown, Gazprom reliability issues;

limitations on South African and Russian exports

Increased export opportunities for Illinois Basin steam coal,

shipped via the Gulf of Mexico. Coal imports into the U.S. (which are primarily steam coal) are

likely to contract in the near term due to high international coal

prices, and competition between coal and natural gas.


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18

Capacity at Major U.S. Coal Export Terminals

Capacity Utilization And Available Capacity at Major U.S. Coal

Export Terminals(loading & capacity data in mill ions of short tons)

2010

Loadings

(export +

coastwise)

Estimated

Total

Capacity

(best month

2010 x 12)

Estimated

Capacity

Utilization

(%)

Estimated

Available

Capacity

Hampton Roads

Lamberts Point 16.7 21.6 77% 4.9

DTA 14.0 18.0 78% 4.0Pier IX 7.3 11.6 63% 4.3

Subtotal for Hampton Roads 38.0 51.2 74% 13.2

Baltimore

CNX Marine (Consol) 10.8 15.6 69% 4.8

Chesapeake Bay 4.5 7.0 64% 2.5

Subtotal for Baltimore 15.3 22.6 68% 7.3

Gulf Coast (New Orleans + Mobile) 24.6 36.5 67% 11.9

Total 77.9 110.3 71% 32.4

Data source: T. Parker Host presentation to Coaltrans USAconference, February4, 2011


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Key Drivers of Coal

Price Volatility


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Coal production capacity planned to meet rather

than exceed demand worldwide

U.S. Central Appalachian region hitting serious

supply limits

Depletion of existing mines

Long permitting cycle and smaller reserve

blocks for new mines

Production impact of valley fill issue and new

safety regulations


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(contd)

U.S. coal prices affected by volatility in

international coal markets

Economic cycles Industrial demand

Natural gas prices

SO2 emission allowance prices

Stockpile Levels

Transport Pricing and Service


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22

Historical Natural Gas Prices (prompt month

contract)

(1994-Present)


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Natural Gas Futures Prices


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Recent Coal Price Volatility (And Soft Demand) Appears To

Have Reversed 2002-2006 Decline in Stockpiles


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25

D. Coal Transportation


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Rail Rate Increases for PRB Coal Shipments

26


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Rail Rate Increases for Domestic Shipments

of CAPP Steam Coal

27


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Rail Rate Increases for Steam Coal Exports

28

CSX Tariff Rates for Steam Coal Exports, 2007-2011

Ori gi n De stina ti on

Rate

EffectiveJune 2,

2007

Rate

EffectiveApril 1,

2009

Rate

EffectiveApril 1,

2010

RatesEffective

April 1, 2011

%

change2007-

2009

%

change2009-

2010

% change

2010-2011

%change

2007-2011

MGA District

Baltimore, MD

(Chesapeake Bay Piers

or CNXCoal Terminal) Base Rate (US$/short ton) $18.84 $33.60 $34.58 $40.79

F uel S urc harge ( US $/ sho rt t on) $0. 84 $0. 00 $0. 80 $1. 40

Total (US$/ short t on) $19. 68 $33.60 $35. 38 $42. 19 70.7% 5.3% 19.2% 114.4%

Kanawha District

Newport News, VA

(Dominion Terminal or

P ier IX Term inal ) B as e Rat e (US $/ short t on ) $20. 45 $35. 00 $36. 10 $43. 05

F uel S urc harge ( US $/ sho rt t on) $1. 19 $0. 00 $1. 14 $1. 99

Total (US$/ short t on) $21. 64 $35.00 $37. 24 $45. 04 61.7% 6.4% 21.0% 108.1%

MGA District

Baltimore, MD

(Chesapeake Bay Piers

or CNX Coal Termi nal) Bas e Rat e (mi lls /t on-m ile) 47. 1 84. 0 86. 5 102. 0

Fuel Surc harge (mills/ton-mile) 2.1 0.0 2.0 3.5

Total (mills/ton-mile) 49.2 84.0 88.5 105.5

Kanawha District

Newport News, VA

(Dominion Terminal or

Pier IX Terminal) Base Rate (mills /ton-mile) 36.0 61.6 63.6 75.8

Fuel Surc harge (mills/ton-mile) 2.1 0.0 2.0 3.5

Total (mills/ton-mile) 38.1 61.6 65.6 79.3

Notes:

1. The base rates shown above assum e 10,000 ton unit trains.

2. CSXs witched from a revenue-based to a m ileage based fuel surcharge effective April 23, 2007.

The mileage-based fuel s urcharge was 22 cents per carload per m ile effective June 2, 2007.

All fuel surcharges have been converted to $/ton to facilitate comparisons across periods.

The mileage-based fuel s urcharges were computed based on shipments originating at Bailey,PA (for the MGAdistrict) or Harris, WV(for the Kanawha district) in 100-ton cars.

Sources: CSXTransportation Tariffs 4734-I, 4734-M, 4734-O, 4734-P and Publication 8661.


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Current Rail Rate and Service Trends

Rail rates for coal shipments to both captive andcompetitively-served destinations areapproaching the Surface Transportation Board(STB) maximums for movements to captivedestinations.

Thus far, the railroads appear willing to acceptsome loss of volume in return for higher

margins, rather than structuring rates toimprove dispatch at coal plants affected by coalvs. gas competition.

Service on some railroads has suffered as therebound in coal demand has outstripped theavailable supply of railcars, train crews, and

locomotives.


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Key Observations

US coal growth will slow: limited new plants, strongcompetition in near term from low-priced natural gas

Scrubber installations will drive increased use of high-sulfurIllinois Basin and Northern Appalachian coal (often as asubstitute for CAPP coal.

The Illinois Basin will likely be the next new major coalgrowth area

For structural reasons coal prices are likely to remainvolatile

Non - US coal demand will increase over long term

Mine permitting issues, rising mining costs, and difficulteconomics vs. natural gas generation will likely lead tocontinued declines in CAPP coal production in the near term.

The high coal inventories built up during 2009 are beingdrawn down.

Both Hazardous Air Pollutants (HAPs) regulations andpotential CO2 emissions regulations are significant sourcesof uncertainty for coal-fired generation, and will likely be keydrivers of coal vs. gas economics, and planning decisions fornew generation, for the foreseeable future.

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