Why the sudden surge? Wyoming coal is seeing unprecedented demand from eastern consumers. “PRB coal is going about as far east as it can go,” Tom Hiemstra, vice president of coal services for energy brokerage firm Evolution told markets’ Dow Jones Newswires. Even mid-western power plants, he said, were testing the coal for use. This situation will certainly benefit miners like Arch Coal and Peabody Energy Corporation, the two biggest supply holders in the Basin.
This influx of demand and use is driven partially by economic and partially by environmental issues. The price of western coal is currently topping off at about $US7.15/ton for next-month delivery. Even with higher transportation costs affecting the net cost, eastern coal sits significantly higher at over $US60 per ton.
Consultant Steve Doyle of Doyle Trading Consultants, whose clients include investment firms interested in the coal sector, feels the lower cost issues extend far beyond the raw product. “Compare the cost at the burner tip of PRB coal with many eastern coals at current price levels, and you will see the scale tip very much in favor of PRB coal,” he said in a recent statement. “I believe you would come to the conclusion that paying a few dollars extra to lock in term-contracts for PRB coal is a very worthwhile exercise for a utility.”
According to a spokesperson for consulting firm John T Boyd, the rise in cost was inevitable, and it felt the increases would be incremental. “Boyd believes PRB prices will exhibit less volatility than witnessed in Eastern coal markets; nevertheless, a gradual increase in the average price is anticipated.”
Because of the demand, rail transportation issues have created concern. According to Associated Press, only a limited amount of the Basin coal demand could be shipped east last year because railway systems were congested. “In 2004, you had a high demand for PRB coal, but the railroads weren’t able to get it to consumers,” said Doyle. “In 2005, the performance of the railroads has been tremendous.”
“Demand for PRB coal has been somewhat muted in the east due to real and perceived rail capacity constraints in the southern PRB,” the Boyd spokesperson said. “Eastern utilities not already using PRB coal viewed the ongoing rail situation as a detriment. Consequently, PRB coal may not have received sufficient consideration as a viable fuel alternative. Announced efforts by the railroads to relieve these problems, combined with the dramatic increase in the price of sulfure dioxide allowances, will provide incentive to utilities to consider trial shipments of PRB coal.”
From an environmental standpoint, PRB coal has other benefits, the first and most crucial being that Western coal burns cleaner because it contains less sulfur – a costly liability to power plants. Additionally, less sulfur dioxide (SO2) allowances would need to be purchased, a very attractive factor to utilities. Recent figures show SO2 trading at $US880 a ton, a 26% increase since the start of 2005.
This increase has helped to raise the price of Basin coal by about US40 cents per ton since January, Doyle estimated. He also said that better performance from the two main rail carriers out of the Basin, Union Pacific and Northern Santa Fe, would put 26 additional tons of coal on the market this year over last, allowing a better purchase opportunity for the Eastern market.
