Tech Talk - Coal prospects

Last week was the annual Society of Mining Engineers annual meeting, this year in Salt Lake City, with the title “Leadership in Uncertain Times.” To illustrate the point it had some 6,000 members or more in attendance, as I hear and was quite successful from that point of view. However, through the grapevine I also heard that some of the mining companies are less optimistic of the future, with job offers made for this summer being withdrawn in several cases.

There is a considerable question as to the future of coal, as the title reflects, and this has as much to do with concerns over the construction or not of additional coal-fired powered stations around the world and the changing market as older plants are withdrawn from service. Some of the reason for uncertainty can be seen in the predictions from the EIA for the domestic coal market over the next year or two.

Figure 1. The decline in coal production in the United States over the past two years. (EIA)

The EIA note that last year was the first that production had fallen below 1 billion tons in the past 20 years. It does however forecast that production will increase this year by 3.9% before falling 1.5% in 2015. In both years however it will remain above that billion ton mark. I have written recently about the recent report “Warning Faulty Reporting of US Coal Reserves,” (in which the conclusion is drawn: “Rather than having a “200 year” supply of coal, there is now abundant evidence that the US is rapidly approaching the end of economically recoverable coal.“)

The two stories are, to a significant degree, discussing different topics, although the beginning of the Clean Energy report also discusses the rising price of domestic coal, and why – as it rises – so the switch to other fuels can be anticipated to continue. However, in that regard it is worth noting this other graph from the EIA.

Figure 2. Spot price of coal by basin over the past three years (EIA )

For those who forget 1 MMBtu (million Btu) is roughly equivalent to 1,000 cu ft of natural gas. The EIA also record natural gas prices and, in comparison to the coal price, that of natural gas – for equivalent energy – is considerably higher.

Figure 3. Natural gas prices (Henry Hub) (EIA )

Why then does the Clean Energy Report suggest that coal costs are going up, when as the plot above shows the spot price has been remarkably stable?

Figure 4. Cost of delivered coal in the US from 2004 – 2012. (Clean Energy)

Notice however, in this case, that the cost is for delivered coal, and the cost of that delivery is what has been going up over the past few years. (And you wonder why Warren Buffet invested in railways?

Figure 5. Changes in Railroad freight costs since 1981. (Association of American Railroads)

If you look at the plot you will see that the cost per ton-mile has increased fairly steadily over the past four years from just above 3 cents to 4 cents a ton-mile, which explains a significant part of the increased fuel costs. Railroad income has risen, since 1981, from just under $3 billion to $12 billion.

So what is the future likely to be? Well there is an additional source of income to the industry, outside of the US power plants, and that is through exports. Yet here the story is not really that different. Since 2005 the value of coal exports from the United States have tripled. This is not just a volumetric increase (which has happened with steam coal) but includes an increase from higher prices for metallurgical coal. (Powder River steam coal at 8,800 Btu sells for around $12.35, while the 13,000 Btu Northern Appalachian coal goes for $68.65 a ton. (This is one of the discriminating factors within the coal market that the Clean Energy Report fails to fully discern). Exported coal saw a steadily rising price from 2007, when it averaged $70 a ton through 2011, when it was priced at $148 a ton before falling to $118 in 2012 and to $96 in 2013. Roughly 46 million tons went to Europe in 2013, down from 51 million tons in 2012, while roughly 22 million tons went to Asia (down from almost 26 million tons). Of this about half the European and a third of the Asian coal was steam coal needed to feed coal-fired power plants.

The problem that the industry faces is that this downturn in both domestic and export demand that became evident last year is likely to continue into the next few years. In the case of Europe pressure to close coal-fired power plants continues, despite increasing concerns that the existing base is approaching a point where supply will no longer be able to meet demand. The Sunday Times carried a story this Sunday about Npower and their owner RWE, which produces 10% of the electricity in the UK, but which is writing off hundreds of millions of dollars as it devalues its current power stations, which are being closed by regulation, even as it fails to build replacements, which it is reported to find unattractive in the current political climate. Last December the NPower CEO noted that over the past year the spare capacity in the UK had fallen from 15% to 5% and if that continued this year (and there are more scheduled closures) then by next winter the reserve may be gone and the country may see the start of blackouts that will continue for some years.

In the same vein the United States is also cutting coal-fired production. An article in Motley Fool points to the trend over the next few years.

Figure 6. Projected coal fired power plant closure effects (EIA via The Motley Fool)

However this projection is possibly a little disceptive, since it does not foretell what might happen if “clean coal” can get a grip on the industry. As TMF points out:

But EIA's retirement projections may be too high. While air emissions standards will result in heavy fines, utilities may still foot the bill because of coal's relatively cheap production costs.

With natural gas prices up 50% this year to a four-year high, energy companies are scrambling to find cheaper energy. According to data compiled by Bloomber, an average natural gas plant makes $3.04 a megawatt-hour off its fuel, compared to a whopping $31.58 for coal-fired plants.

While coal might seem like a no-brainer bet, "clean coal" is far from a sure thing. Southern Company has been working hard to bring its 582 MW Kemper County, Miss., clean-coal plant online, but the $5 billion project is currently 65% over budget.

A Department of Energy report estimates that clean coal costs are roughly double that of coal, but companies like Southern Company are hoping to reinvent coal's future.

Unfortunately building new coal demand, when set against the destruction of current plant in both the US and Europe, will take some years and thus, while the future for coal might, in the long term be strong, in the shorter term one can understand why coal companies might be hesitant to hire new engineers. The reduced demand will, inter alia, lengthen to time that current supplies last, though I perhaps need to address that issue in a subsequent post.