Arch Coal says US coal markets are dynamically responding to the scarcity of coal in the global landscape. With severe supply constraints in traditional coal export nations, including flooding in Australia, power outages in South Africa and coal shortages in China and India, Arch believes that US coal increasingly will be valued for purposes of supply diversification.
Arch estimates that coal imports into the US were essentially flat in 2007, as supply – primarily from South America – was diverted into higher-priced seaborne trade. Over the same time frame, US coal became the swing supply for the global market. In fact, Arch estimates that US coal exports grew by close to 10 Mt in 2007, and conservatively expects another 20-Mt increase in 2008.
Pricing for international metallurgical and thermal coal has been robust, and has positively influenced pricing in key domestic coal markets. Central Appalachian coal index prices increased an average of 34% in 2007, and have reached the $70/t mark for second quarter 2008 delivery. Likewise, Powder River Basin coal index prices increased more than 50% in 2007, and have approached the $15/t mark for second quarter 2008 delivery.
These domestic price increases have been supported by positive supply and demand trends in US coal markets. On the supply side, Arch estimates that domestic coal production declined more than 16 Mt in 2007, with more than half of this decline occurring in Central Appalachia. Looking ahead, Arch continues to expect significant geologic and regulatory challenges in Central Appalachia to constrain production in this region.
On the domestic demand side, US electric generation grew by close to 3% in 2007, according to statistics compiled by the Edison Electric Institute. Arch estimates that coal consumption for power demand in the electric power sector increased nearly 20 Mt last year – compared with a nearly 11 Mt decline in 2006 – driven by relatively average economic growth and more favourable weather. During the first half of 2008, Arch expects slower growth in electric generation demand driven by a weaker US economy, but forecasts US coal consumption for the full year to exceed that of 2007.
Arch estimates that US generators held approximately a 51-days supply in stockpiles at the end of 2007, compared with a 50-days supply at the end of 2006. Arch continues to believe that increased stockpiles, nearly all in the West, stem in part from an effort by US generators to increase inventories as a hedge against future supply disruptions.
“2007 was a transitional year for U.S. coal markets,” said Steven Leer, Arch’s Chairman and CEO. “With increased coal consumption and reduced production levels, the market was able to essentially rebalance itself. Looking ahead, we foresee a dynamic coal market in 2008, with robust international coal demand providing the catalyst for further strengthening in domestic coal markets. While expectations for a US economic slowdown remain a concern, normal weather trends and strong global markets are driving price levels to new highs.”
Furthermore, Arch estimates that 14 GW of new coal-fuelled capacity are now under construction in the US, representing the addition of roughly 50 Mt of new annual coal demand. These identified plants will be phased in over the next four years, with roughly one half expected to start-up by the end of 2009. Another 8 GW – representing more than 30 Mt of additional incremental annual coal demand – are in advanced stages of development. Arch expects the majority of these plants to be built during the next five years.
“We believe that building new coal-fueled generation capacity is the right answer for America, as it provides us with affordable, reliable and secure domestic energy for decades to come,” continued Leer. “At the same time, we believe it is essential to increase investment in technology that can make coal use in this country and around the world cleaner, more efficient and more climate-friendly.”