Autumn 2004, the Outlook for Eastern Coal Demand, Supply,

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) Source: Coal News and Markets Report & Platts Coal Outlook 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 hotissue 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) Av erage price (nominal dollars) 40 18.83 31.76 30 1995 2025 Eastern 20 U.S. average 10 Western History 0 1990 1995 2002 2010 Projections 2015 2020 2025 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 18,000 16,000 Thousan Short Tons 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Exports Imports Source: Quarterly Coal Report, September 2004 20 01 Q 20 1 01 Q 20 2 01 Q 20 3 01 Q 20 4 02 Q 20 1 02 Q 20 2 02 Q 20 3 02 Q 20 4 03 Q 20 1 03 Q 20 2 03 Q 20 3 03 Q 20 4 04 Q 20 1 04 Q 2 Year/Quarter 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 1400 History Total U.S. Proj. 1200 1000 Million Short Tons 800 Production forecast to rise 3.4% in 2004, 3.5% in 2005 Western Region 600 400 Appalachian Region 200 Interior Region 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 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 24 22 Billion Short Tons 20 18 16 14 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Annual Coal Report, September 2004, and previous versions 2003 Observations . . . Why coal supplies are short – • Economics – chronic low contract coal prices drove six sizable bituminous producers to bankruptcy protection (20022004), 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 Other Asia, Africa & Oceania Turkey 8 Taiwan 7 6 Liberia Million Short Tons 5 Korea 4 Japan 3 India 2 Egypt 1 0 Jan-July 2004 Jan-July 2003 Source: National Mining Association, September 2004 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 5% 4% 3% Percent History Projections 2% 1% 0% -1% -2% 2002-2003 Total Demand Electric Power Sector 2003-2004 2004-2005 Coke Plants Retail and General Industry Source: Short Term Energy Outlook, October 2004 Integrated Energy Forecasts Total Natural Gas Demand Growth Patterns 12% 10% 8% Percent Change History Proj. 90 80 Billion Cubic Feet per Day 70 60 50 40 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 6% 4% 2% 0% -2% -4% -6% Percent Change (Left Axis) Total (Right Axis) Source: Short Term Energy Outlook, October 2004 Integrated Energy Forecasts Total U.S. Electricity Demand Patterns 8% Percent Change from Year Ago History Proj. 12 Billion Kilowatt-hours per Day 6% 10 8 4% 6 2% 4 0% 2 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Percent Change (Left Axis) Total (Right Axis) -2% 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) 1,600 History Projections 1,200 Total 800 Western 400 Eastern 0 1970 1980 1990 2002 2015 2025 Source: Annual Energy Outlook 2004, January 2004 Long-Term Energy Projections Coal Production by Sulfur Content, 2002, 2010, and 2025 (million short tons) 900 Low-sulfur Medium-sulfur High-sulfur 600 300 0 2002 2010 2025 Source: Annual Energy Outlook 2004, January 2004 Long-Term Energy Projections U.S. Coal Imports and Exports, 2002 and Projections to 2010 and 2025 50 Exports Imports 40 30 20 10 0 Million Short Tons 2002 2010 2025 Source: Annual Energy Outlook 2004, January 2004 Long-Term Energy Projections Coal Mining Labor Productivity, 1990-2025 (short tons per miner per hour) 25 History Projections 20 Western 15 10 U.S. average 5 Eastern 0 1990 1995 2002 2010 2015 2020 2025 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 EIA’s National Energy Information Center, 202-586-8800, infoctr@eia.doe.gov EIA Website: http://www.eia.doe.gov/ •