In early 2001 gas production was struggling to match demand during a cold winter and being sold at prices as much as eight times the equivalent cost of coal. The main problem for coal producers at that time was training enough new miners to satisfy the projected increase in coal demand. The euphoria of the US coal industry was, however, short lived.
The deepening US recession in the second half of 2001, the events of September 11, and mild 2001/02 winter conditions in the Eastern United States have slowed energy demand. Coal and gas prices have, in response, fallen back to more normal levels. Coal supply capacity is now well in excess of demand, with inventory having risen from 127 Mt to 155 Mt over the course of 2001.
Despite the promising start to the year, in the end there was no growth in US coal consumption over the full course of 2001, with total consumption stagnating at the 2000 level of 981 Mt.
Consumption by the electricity sector fell 1.4% to 879 Mt and at coke plants consumption of metallurgical coal was down by 8.3% to 24.1 Mt. Only a robust 24.5% increase in demand by general industry saved the US from an overall fall in coal consumption in 2001.
On the other hand, production increased by 43.3 Mt (4.4%) to 1,016 Mt. With consumption static, production up, and net exports not much changed, a fall in prices was inevitable. Spot coal prices have nearly halved from US$48 per short ton (US$53/tonne) FOB Sandy River in June 2001 to a recent low of US$26 per short ton (US$29/tonne) in mid March 2002.
As a consequence, coal companies are belatedly cutting back production plans. Pittston, for example has idled the mining operations of its Clinchfield Coal Company, Sea “B” Mining Company, Paramont Coal Company and Motivation Coal Company, all in Virginia, for eight days starting 1 April 2002. In addition, some employees at Motivation Coal Company were temporarily laid off as of 1 April. Other employees of Vandalia Coal Company in West Virginia were also laid off as of April 1. The Pittston Company is actively pursuing the sale of some of its coal operations.
While productions cuts are obviously necessary in order to reduce the coal inventory overhang, it may well be that the US coal market has already hit bottom. The US economy is on the mend and gas prices have risen strongly since the end of January, so coal demand can be expected to resume growth.
Spot gas prices were over three times as high as spot steam coal prices (on an energy equivalent basis) by the end of March – the kind of differential that often leads to a rise in coal prices.
Gas prices are of course only one of many factors that influence coal prices. Indeed the direct statistical relationship between the two price series is poor but the correlation improves markedly when gas prices are compared against lagged spot steam coal prices. This may be due to the inertia of steam coal spot prices that is a feature of its lower liquidity and transparency compared to gas, as well as the buffering influence of coal inventories. So there does appear to be some validity in the assertion that a rise in spot gas prices now is likely to mean a rise in spot steam coal prices down the track.
With the wonderful benefit of hindsight it is clear US coal producers reacted too aggressively, and too late to the upswing in coal markets last year. If we are right in our evaluation that domestic coal demand is set to recover, producers may again be reacting too late and too aggressively to the changing market conditions.
The fall in domestic steam spot prices over the last nine months has certainly led to steam coal exports falling much less than had been expected (yes we sure got that one wrong). It has also stemmed the flow of high volatile coking coal that was diverted from export markets into the domestic steam coal market for most of last year. This reversal has contributed to the recent fall in European prices for US high-volatile metallurgical coal.
