The fundamental driver to both exports and imports is of course the relative levels of coal prices on domestic markets versus international markets. Domestic coal prices continue to hit new records, with the spot steam coal price free-on-barge at the Big Sandy River reaching US$46.00 per short ton in mid May – up 111% from the low point of US$21.75/ short ton in December 1999.
An indication of future spot coal prices can be gleaned from the relationship between steam coal and natural gas spot prices. In 1998 and 1999, prior to the surge in gas prices last year, NYMEX gas prices averaged 2.3 times the Big Sandy spot coal prices on an energy equivalent basis.
NYMEX natural gas prices fell from peak of US$9.80/Mbtu in December 2000 to US$4.291/Mbtu in mid-May – a level 2.5 times the price of coal. The forward curve for NYMEX gas contracts is remarkably flat, with prices for the remainder of 2001 and 2002 lying in a narrow range between US$4.1–4.8/Mbtu. Assuming the historical price relativity between gas and coal is maintained at a factor of 2.3, this would indicate spot coal prices until the end of 2002 would lie in the US$47–55 per short ton range.
Analysis of US coal market fundamentals, however, indicates such lofty price levels are unlikely to be maintained, even over the short term. US bituminous coal production costs generally lie around the US$20 per short ton mark - Massey Energy, for example, reported production costs of US$20.82 per short ton for FY 2000.
Healthy profit margins can therefore be achieved with coal prices anywhere north of US$30 per short ton – so production (and imports) will be actively expanded, and tend to force prices down. This process will be slowed by a shortage of trained miners, rail capacity limitations out of the Powder River Basin, and, in Appalachia, restrictions on mountaintop removal mining and increasingly difficult mining conditions.
It is likely therefore that the historical gas – coal price relativity will be dislocated again, with steam coal pot prices expected to fall into the US$40 – 45 per short ton range after the northern hemisphere summer. Steam coal will consequently maintain a substantial price advantage over gas in the electricity sector and demand will remain strong.
With this as background, the future trend of US imports is clear. In addition to ongoing high domestic steam coal prices there are other important drivers:
- Highly competitive delivered costs of Colombian and Venezuelan coal into power plants along the Gulf of Mexico and Mississippi system.
- Low sulphur content of Colombian and Venezuelan coal that make it ideal for blending with higher sulphur Appalachian coals, in order to comply with the Clean Air Act.
- Increased penetration of US coking coal markets by Western Canadian producers as a result of the high US prices and an advantageous exchange rate.
The increase in US coal imports can be seen to be structural rather than cyclical. There is also little doubt about the capacity of Colombia in particular to expand exports over the long term, with substantial mine capacity expansions underway at Cerrejon Norte, Cerrejon Central and Calenturitas. US coal imports increased by 37% to 11.3Mt in 2000.
Imports in the March 2001 quarter maintained a similar growth rate to reach a level of 3.5Mt, up 39% from 2.5Mt in the first quarter of 2000. The rate of growth of imports will slow when domestic coal prices inevitably ease, but the underlying drivers of relative costs and coal quality will continue to underpin growth over the long term. US coal imports are forecast to reach 19Mt by 2005 and 22Mt by the end of the decade.
But what of the level of future US coal exports? Total exports fell to only 10.9Mt in the March quarter, down 12% from the equivalent period of 2000 (see table on page 6). Steam coal spot prices into Europe were running at a little under US$42/t CIF in mid-May. To convert this back into price equivalence with US domestic prices in rough terms we need to subtract around US$6/t for ocean freight, and around US$10/t for the price differential between transport to export ports versus domestic distribution points such as the Big Sandy.
This gives a domestic equivalence price of US26/t, assuming barge loading and port loading are similarly priced. In other words domestic coal prices would have to halve from the current level of US$51/t (US$46/ short ton) to make steam coal exports to Europe look attractive again.
US steam coal exports have been underpinned by sales into Canada Japan (from Utah and Colorado) and Mexico, which together accounted for 15.8Mt (73%) of total US bituminous steam coal exports of 21.8Mt in 2000. A large chunk of the remaining 6.0Mt of 2000 steam coal exports, mainly to European destinations and Korea, is likely to be forfeited this year – a halving of these exports to 3.0Mt is expected this year.
The 3.2Mt of exports to Japan looks tenuous despite Japanese equity participation in the Los Angeles Export Terminal (LAXT). Perhaps another 1 million tonnes could be lost there this year.
Exports of steam coal to Mexico have historically been largely limited to minor rail dispatches from Twentymile mine in Colorado to CFE’s Carbon II power plant. This trade is under a medium term contract and consequently looks secure. Western exporters, via LAXT, are expected to pick up some of the tonnage into CFE’s 2100-MW Petacalco power station, which has been converted to dual oil and coal firing. Assuming LAXT picks up about a third of Petacalco’s coal requirements this would add 2Mtpa to US coal exports.
