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Transport costs and quality divide US coal industry into East vs. West


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Transport costs and quality divide US coal industry into East vs. West

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A dragline shifts a landscape by moving overburden off a seam of Powder River Basin thermal coal at Cloud Peak Energy's Antelope mine in Wyoming in September.

Source: S&P Global Market Intelligence

Transportation costs and coal quality are major factors in a growing gap between the coal markets in the Eastern U.S. and those in the West.

While there are differences among individual basins, the West comprises the Powder River Basin, which straddles the border of Wyoming and Montana and is the most productive coal-mining region in the country; the Uinta Basin in Colorado and Utah; and various lignite-producing regions and other mines. The East includes Appalachian regions whose north and central areas are closest to major Atlantic transportation terminals, as well as the Illinois Basin.

Most of the highest-value coal, metallurgical, comes from the Eastern basins, but the challenges and prospects of metallurgical markets, both domestically and overseas, are vastly different from those of thermal coal.

Over the past 10 years, the relative production of Eastern and Western mines has shrunk nearly in tandem, according to data compiled by S&P Global Market Intelligence, but the fortunes for major U.S. coal-producing regions are likely to diverge as demand for domestic coal dwindles.

According to Seaport Global Securities LLC analysts, 2018 output will likely decline a little in the Powder River Basin compared to 2017 while prices will stay stagnant, even as Central and Southern Appalachia benefit from increased metallurgical coal demand overseas. Illinois Basin and Northern Appalachia production also will fall, they predicted.

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Reaching a market

Port capacity and the ability to get coal to ports are problems that affect nearly every basin, though in differing degrees.

The great majority of U.S. exports are shipped out of Maryland and Virginia terminals. William Wolf, vice president of business and market analysis at John T. Boyd Co., said the East Coast ports are "certainly below demonstrated maximum capacity" but the surrounding areas would need more infrastructure in order to increase capacity to any great degree.

Recently, tightness in Northern Appalachia coal moving out of the Baltimore ports has forced some shippers to move their commodity down through the waterway system to the Gulf Coast, often a viable option for some major Appalachian and Illinois Basin producers.

Wolf said that among Eastern coal regions, the Illinois Basin is blessed with more scalability because the Gulf Coast can increase capacity using offshore ports.

Reaching the Gulf Coast presents its own obstacles. Barges are not always available, and the waterways themselves can be problematic — damaged canal locks on the Ohio River delayed coal barges in September and October.

"You talk to anyone that deals with the river and they say that we're dealing with these locks," Wolf said, adding that coal shippers also have to compete with grain shippers for tugboat capacity.

Ports in Houston; New Orleans; and Mobile, Ala., all saw year-over-year increases in coal exports in the first three quarters of this year.

Dan Vaughn, principal and owner at Coaldesk LLC, noted that the Gulf ports are not fenced off to Western producers and said the export market is strong right now for nearly all basins except the Powder River Basin, situated thousands of miles from terminals.

That distance puts Powder River Basin producers at a disadvantage compared to competitors in places like Australia, where "a couple of hundred miles is a long freight," said Bob Burnham, analyst and founder at Burnham Coal LLC.

Burnham said plans for West Coast export terminals have dwindled in recent years, and that even if Millennium Bulk Terminals-Longview ultimately gets built, it will still be expensive for Powder River Basin producers to move their coal across the Rocky Mountains to reach the port.

In the Uinta Basin, Utah benefits from more long-term contracts and resiliency in the domestic sphere than Colorado. Vaughn said Utah is better situated for exports as well.

"I'd like to buy some [Utah coal] right now if I could find some," he said.

Nickeled and dimed to death

While the Eastern producers jockey for slots at the Atlantic and Gulf ports, the Western basins mostly focus on domestic power plant clients.

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A freshly exposed Powder River Basin coal seam in Cloud Peak Energy's Antelope mine in Wyoming in September 2017.

Source: S&P Global Market Intelligence

An industry executive has called for consolidation in the PRB region to effect a more disciplined approach to production.

Wolf said having 16 active mines operated by nine different companies creates disjointed pricing.

"Everybody's knocking a nickel or a dime off their sales prices to gain a bit," he said.

This kind of competition also happens in the East, but a discount of even a few cents hurts a lot more at low Powder River Basin prices than at Appalachian thermal coal prices, which can be five times as high.

New players entering the Powder River Basin mix such as Blackjewel LLC, which recently bought Contura Energy Inc.'s two mines in the region, could add to the uncertainty, especially if Blackjewel increases output to monetize its purchase.

Murray Energy Corp. CEO, President and Chairman Robert Murray has always been skeptical of the Powder River Basin's model.

"I never believed that transporting low-heating-value coal, containing 20% water, in railroad cars over long distances, would meet the test of time, nor do I today," Murray said in an April 27 speech to the Barnesville Area Chamber of Commerce in Ohio.

Murray Energy predicts inferior heating values will drive increasing quantities of Powder River Basin coal out of the market. Average prices are about $12 per ton, while higher Btu thermal coals from other basins range from $32 per ton for Illinois Basin coal to $60 per ton for Central Appalachian coal, according to recent data posted by the U.S. Energy Information Administration.

Murray has also warned of the impending end of westbound Uinta Basin coal, though he recently made a play to form a partnership to acquire the assets of Uinta producer Bowie Resource Partners LLC that ultimately fell through when Bowie put an end to a debt deal that was a condition to the new partnership.

Wolf takes a different view. He believes the low cost of accessing Powder River Basin coal means the area will always remain competitive despite the high transportation costs.

Burnham believes Powder River Basin production will continue at roughly current levels, and is unlikely to return to the lows of 2016. Many of the challenges that divide the east and west right now will remain unchanged for the foreseeable future, he said.

"I think we're going to see a lot of the same and unfortunately that's a little depressing," he said. "I liked it better when the industry was booming."

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Underground mining equipment at a Knight Hawk mine in the Illinois Basin.

Source: S&P Global Market Intelligence