Coal supplyoverview
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  • 1. Coal Supply Overview December 16, 2004
  • 2.
    • Supply Perspective
    • History and Forecast
    • International Market Factors
    • Coal Transportation
    AGENDA
  • 3. US COAL PRODUCTION HISTORY
    • Fundamental Shift
      • Bituminous coal decline
      • Sub-bituminous growth fueled by SPRB
      • Now nearly 50/50
    • Recent Small Decline
      • Temporary
      • 2004 on pace for 1.1 billion tons
  • 4. US COAL FORECAST DEMAND
    • Near-Term
      • Decline in Central Appalachian production
      • Growth captured by PRB and Northern Appalachia
    • Long-Term
      • Bigger PRB growth
        • Mercury is issue, though
      • Stage set for Appalachian rebound
        • Stimulated by Hg control
        • If re-capitalization occurs
  • 5. US EASTERN COAL SUPPLY
    • Near-Term
      • Central Appalachian production decline
      • Northern Appalachia production increase
        • Re-capitalization required
    • Long-Term
      • Continued Northern Appalachia market penetration
        • Re-capitalization required
      • Central Appalachia rebound
        • Re-capitalization required
  • 6. US WESTERN COAL SUPPLY
    • Near-Term
      • Sub-bituminous (SPRB) penetration into gulf lignite and eastern markets
      • Sub-bituminous penetration into southwest markets (limited)
    • Long-Term
      • Sub-bituminous growth expansion into eastern markets
        • Eastern coal production near peak
      • Bituminous western coal pickup
  • 7. US COAL SUPPLY MARKET DRIVERS
    • Mine Costs
      • Rising in the east dramatically, productivity dropping
      • Rising a little in the west, productivity steady
    • Environmental Regulation
      • Uncertainty creates an environmental “premium” that must be captured by someone
        • Delays new plant construction (perceived risk)
        • Volatilizes pollutant commodity prices
        • New regulation not yet captured in modeling, but expected
    • Transportation
      • No limits
      • Cost of required increased capacity not in PRB pricing yet
    • Market Pricing
      • Crude and natural gas sympathy vs mine costs
      • Spot vs contract
  • 8. RE-ORDERED EASTERN COAL PRICES
    • Punctuated Equilibrium - East
      • Pre-2000
        • Unhealthy fitness landscape
        • Sales at below cost
        • Rationalization, etc.
      • 2000/2001
        • The “Perfect Storm”
      • Post 2001
        • Healthier fitness landscape
        • Sales at full cost plus rate of return
        • No actual floor set…yet
  • 9. RE-ORDERED WESTERN COAL PRICES
    • Punctuated Equilibrium - West
      • Pre-2000
        • Unhealthy fitness landscape
        • Sales at cost
        • Rationalization, etc.
      • 2000/2001
        • The “Perfect Storm”
      • Post 2001
        • Healthier fitness landscape
        • Sales at full cost plus rate of return
        • Floor set
  • 10. EASTERN COAL PRODUCTIVE CAPACITY
    • Sharing the Pain
      • All eastern supply regions will need re-development capital
        • Central Appalachia hit hardest
    • Environmental Issues
      • Not just boiler side
        • Valley fill issues, permitting problems
    • Timing
      • Beginning by 2009, accelerating by mid-next-decade
      • Early attention required
  • 11. EASTERN COAL 2004 PRODUCTIVE CAPACITY – COUNTY VIEW
  • 12. EASTERN COAL 2009 RESERVE RECDUCTION – COUNTY VIEW Assuming no new development and 2004 production levels
  • 13. EASTERN COAL 2014 RESERVE REDUCTION – COUNTY VIEW Assuming no new development and 2004 production levels
  • 14. COAL PRICE FORECAST
    • East
        • High for 3 years
        • Decline in gas-abundant world
    • West
        • Steady growth
          • Strip ratio effect
    • Never below full cost
    • Sensitivity
        • Environmental regulation
        • Mine costs
        • Gas abundance
          • LNG imports
  • 15.
    • Supply Perspective
    • History and Forecast
    • International Market Factors
    • Coal Transportation
    AGENDA
  • 16. WORLD CONSUMPTION OF ENERGY
    • US Consumption is Flat
      • One quarter of world consumption
    • Asian Consumption on the Rise
      • China growing (1/3 of Asian consumption) but still half that of US consumption
      • Japan flat (1/6)
      • India/South Korea growing (1/5)
  • 17. WORLD ENERGY CONSUMPTION BY FUEL SOURCE (2003)
    • Asia
      • Coal dramatically important
      • China coal consumption nearly third of world total
      • China coal consumption exceeds US consumption
    • US/Europe
      • Diversified fuel use
      • Europe coal consumption increasing (for now)
      • US coal consumption increasing
  • 18. WORLD COAL RESERVES (PROVED, 2003)
    • US is King
      • But feeds domestic consumption (mostly)
      • 200+ years of reserves at current domestic consumption levels
    • China Must Import
      • Huge reserves, but poor technology and infrastructure
    • Other Players
      • Australia, South Africa long term players
      • Europe largely uneconomic and disinterested
      • Former eastern block a wild card
  • 19. WORLD COAL PRICES, HISTORICAL
    • Abundant, Predictable
      • Prices fell through the 1990s
    • Key Points
      • Mixture of coal types masks price variation
      • US emission regulation price effects - minor
  • 20. EFFECTS OF WORLD COAL MARKET FACTORS ON US COAL SUPPLY
    • High World Coal Steam Prices
      • Increased exports
        • All Appalachian regions
      • Decreased eastern coal for utilities
      • Accentuate already critical supply/demand balance in eastern US
    • High World Coal Met Prices
      • As above, plus…
        • Marginal met coals move from US steam markets to domestic and int’l met markets
    • China
      • From net exporter of coal to net importer in one year
        • Steel-making driving coal demand
      • China demand could limit US import sources
      • Kyoto Treaty limits inconsequential to China
  • 21.
    • Supply Perspective
    • History and Forecast
    • International Market Factors
    • Coal Transportation
    AGENDA
  • 22. US COAL TRANSPORTATION FACTS
    • By Mode
      • 600 million tons – rail
      • 100 million tons – truck
      • 80 million tons – belt
      • 80 million tons – rail to barge
      • 50 million tons – barge
      • 45 million tons – truck to barge
      • +/- 100 million tons – mixed modes
    • By Carrier
      • 200 million tons originated and 150 million tons terminated by UP
      • 200 million tons originated and 125 million tons terminated by BNSF
      • 100 million tons originated and terminated by CSX/NS
      • 25 million tons terminated by Canadian railroads
      • 20 million tons terminated by KCS
    • Costs by Mode
      • Rail
        • West: 10 – 25 mills per ton-mile
        • East: 15 – 45 mills per ton-mile
      • Truck
        • 5 – 20 cents per ton-mile
      • Barge
        • Competitive with rail and better
  • 23. US COAL TRANSPORTATION ISSUES
    • West
      • Joint line capacity increase
        • PRB growth impossible without this, except
          • Re-routing BNSF shipments north
          • DM&E, TRR impacts?
      • PRB mine load-out improvement
        • Follow-on train issues
      • Cost sharing?
    • East
      • Short-Term
        • CSX: equipment shortage?
    • International Effects
      • Return of exports
    • Inter-fuel Competition
      • More coal, less gas
  • 24. SUMMARY
    • Coal Supply
      • In the future
        • More western coal at the expense of eastern coal
        • More Mon River and Illinois Basin coal at the expense of Central Appalachian coal
        • Gas prices set coal price cap; costs set floor
        • Major re-investment need in the east
        • Steadily increasing costs in the west
    • International Issues
      • Chinese demand driving world redistribution of coal and (even) US price impacts
      • Metallurgical coal also matters
    • Transportation Issues
      • Joint line capacity increase is necessary
      • Equipment shortage in the east
    • Wild Card
      • Environmental regulation
        • Inter- and intra-fuel redistribution likely in different scenarios
  • 25. Thank you.