It has been a good year for the US coal sector. The National Mining Association (NMA) estimates that, after being derailed by the global recession, production rose from 1.08 billion t in 2009, to 1.15 billion t in 2010. Further gains are anticipated this year. “We expect 2011 production to be slightly above 2010,” said Luke Popovich, vice president of external communications for the NMA.
Most of US production is thermal coal destined for domestic, coal-fired power plants. Prices for thermal coal in March 2011 were US$ 77/t in Appalachia, US$ 47.50/t in Illinois and US$ 13.95/t in the Powder River Basin (PRB), compared to US$ 60/t, US$ 41.50/t and US$ 11.90/t, respectively, one year ago.
Metallurgical coal has shown significant recent gains. Domestic consumption is around 21 million tpa, but domestic production has grown from 48 million t in 2006 to 77 million t in 2010, primarily due to exports. Most of the US exports of 56 million t in 2010 went to resurgent economies in Brazil, Europe and the former Soviet Union, but significant gains are also being made in China, India and Japan. Prices for domestic metallurgical coal averaged US$ 150/t in Q4 2010, compared to US$ 125/t a year earlier.
The cheery outlook has been reflected in rosy financial returns and splurges on mergers:
- Peabody Energy reported full-year 2010 EBITDA of US$ 1.82 billion, up 41% from the previous year, and record revenues of US$ 6.86 billion.
- Alpha Natural Resources (ANR) spent US$ 7.1 billion to purchase Massey Energy Co.
- Walter Energy bought metallurgical producer Western Coal Crop for more than US$ 3 billion.
However, the coal sector is not without its challenges. First and foremost is the increasingly strict legislative and regulatory climate relating to the environment and climate change. Ironically, the 2010 elections – which saw a Republican majority returned to Congress – may have slowed the advance of regulations against greenhouse gases (GHGs), but the momentum has shifted away from lawmakers and heavily toward regulators. “The Environmental Protection Agency (EPA) and other federal regulators are issuing guidance to states regarding new plants, air quality, mercury, conventional air pollutants and water quality,” said Popovich. “Taken together, the new rules could eliminate 20% or more of the coal-fired capacity in the US.”
The pressure has been growing for several years. The US Supreme Court ruled in 2007 that the EPA has the authority to control GHGs under the Clean Air Act (CAA). The EPA established a tailoring rule starting in January, in which it would impose new emission rules on refineries, coal-fired plants and other facilities emitting more than 100,000 tpa of GHG. The increasingly stringent environmental regulatory climate is resulting in the closure of coal-fired plants and their replacement with other energy sources.
The mining sector itself also faces many regulatory challenges. Over 10% of total US coal production occurs in mountain top operations, primarily in Appalachia. Typically, mountain top overburden is scraped into adjacent valleys before coal production. Rain falling on exposed deposits creates runoff that affects water quality in valley tributaries. In March, the EPA fined Consol Energy US$ 5.5 million for Clean Water Act violations, and ordered it to install US$ 200 million in pollution controls that will reduce discharges of harmful mining wastewater into Appalachian streams and rivers.
Regulators are also seeking more stringent safety rules after the Upper Big Branch mine tragedy in West Virginia. President Obama called for the Mine Safety and Health Administration (MSHA) to strengthen the Federal Mine Safety and Health Act. “During the hearings, regulators were forceful in wanting more authority,” said Popovich. “We say that they have the authority, but they are not using it. Before Congress re-opens the mining law, they want to be certain that regulators have the will to use their current authority.”
Fallout from the Tennessee coal ash spill also continues. In late 2008, over 1 billion gallons of coal ash breached a containment pond at the Tennessee Valley Authority’s Kingston Fossil plant and covered 300 acres of agricultural land and spilled into nearby waterways. “They are about to regulate coal ash as a toxin,” said Popovich. Currently, slightly under half of the 125 million t of ash produced each year is recycled as construction and road bed materials. “Regulating coal ash under the toxic recovery and control act would damage the coal ash reuse market,” said Popovich. “It would end up in a landfill.”
However, one of the greatest challenges to coal is from a competing energy source: natural gas. Surging output from shale deposits has driven US production up and prices down to US$ 4/million BTU. Barclays Capital estimates that it costs a power plant US$ 37.08/MWh to burn coal for power generation, compared with US$ 31.80/MWh to burn gas. Utilities have been switching: over the last five years, the EPA estimates that coal’s percentage of electricity generation has dropped from 49% to 45%, and gas has increased from 20% to 24%. Analysts expect the price advantage to last over the next several years, further eroding coal’s percentage of the marketplace.
An obvious, but expensive, solution to environmental woes is for the utilities sector to install pollution control equipment that complies with new and proposed Government regulations. Appalachian Power, for instance, recently finished installing US$ 2 billion worth of scrubbers that will reduce SO2 emissions by 98% and NOx emissions by 90%.
Plans are well underway to find ways to reduce GHGs. Utilities in the US emit about 2 billion tpa of CO2. In order to meet federal and international reduction targets, Government and industry are working together to commercialise carbon capture and storage (CCS).
Power plants are well suited to adopting such systems, but CCS is expensive to build and operate. To overcome these difficulties, Obama announced the formation of a task force to develop a comprehensive CCS strategy for widespread CCS deployment within 10 years. The goal is to bring 5 – 10 commercial demonstration projects on line by 2016.
Over the next several decades, new uses for coal are expected to emerge. The EIA predicts that by 2030, 112 million tpa will be used for coal to liquid (CTL), in which coal is converted into transportation fuels, and 146 million t of coal will be converted through gasification into a wide variety of energy and chemical products. New uses for fly ash are also being invented, such as a new concrete-coating material that is hundreds of times more durable than existing coatings and half the cost.
Current forecasts for the gradual demise of coal as a fuel source for electricity may also have to be revised. Before the nuclear catastrophe in Japan in March, the EIA had expected US coal-fired electricity generation to grow very slowly, from 1.9 billion MWh in 2010 to 2 billion MWh in 2025. During that time, overall generation was expected to climb 520 MWh, with the majority coming from renewables, gas and nuclear. “The crisis in Japan leaves us with reason to believe that nuclear building will slow,” said Popovich. If, as some suspect, the shale gas phenomenon also fizzles out, that would once again leave coal as the main baseload alternative.
In the long haul, however, the US coal sector may find its greatest fortunes offshore. Peabody Energy estimates that, through 2015, approximately 390 GW of new coal-fired generation capacity will be built globally, requiring 1.2 billion tpa of new coal supply. Global steel production is expected to rise more than 30% during that time, requiring an additional 300 million tpa of metallurgical coal supply. “The long-term supercycle for coal is strengthening with each passing day,” said Gregory H. Boyce, CEO of Peabody, during the company's annual report conference in January. “Nations such as China and India are growing 8 – 10% per year. Hundreds of millions of people each year are moving to the cities, switching on technologies and extending coal’s role as the fastest growing fuel.”
Prices are hot. Industry analysts report contract prices for metallurgical coal in the US$ 230 – 260/t range, and spot market prices exceeding US$ 300/t. Thermal coal has climbed to the US$ 130/t level, and the futures market shows that price expectations are bullish for the next five years.
Coal producers are positioning themselves to take advantage of international growth. After renovations are complete in 2012, the Millennium Bulk terminal on the US West Coast will be able to handle up to 5 million tpa of coal. US producers will benefit from the strategic location, which will allow them to service growing coal demand in Asia – the world’s largest and fastest growing market.
This article is adapted from June’s regional report. Subscribers can log in here to read the full article.
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