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US coals update: Changes and prospects in 2013 Washington, DC

Chris Newman, Editor, Americas Transportation & Coking Coal Molly Christian, Editor, Argus Coal Daily

6 March 2013


• Supply overhang still dominates US coal markets

◦ Production shifts away from high-cost Central Appalachia

◦ New specifications highlight rise of Illinois Basin, coking coal

• Exports may slow but remain bigger focus

◦ Port options proliferate despite slowdown

◦ Arbitrage window narrows for steam coals

• Indexation adapts to new reality

◦ Eastern rail rates link to coal indexation

◦ US Gulf, east coast FOB markets develop

◦ Heat and sulfur adjust to demand

2013: Year of transition

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US coal market fundamentals: Waiting on 2014


“2013 is going to be the year of

the inventory overhang.”

— CSX CFO Fredrik Eliasson

• To reach target level

o What is new normal for

fewer coal plants?

o Previous 140-150mn st

down into mid-130s to

mid 140s st

o Weather, natural gas

prices, producer discipline

Utility coal stockpiles seek new normal


175

180

185

190

195

200

205

Jan-12 Apr-12 Jul-12 Oct-12

mn s

t

Source: EIA


Gas competition: Coal back from lows of 2012


• Gas under $3.25/mmBtu

first nine months 2012

o Southern, AEP burned

more gas than coal

• Unconventional gas

weighs

◦ Another 7.5mn st of coal

equivalent each month

o Acts as a new coal basin

o Gas in storage may end

winter above 2 Tcf

80

110

140

170

200

30%

35%

40%

45%

50%

Jan-10 Aug-10 Mar-11 Oct-11 May-12

mn M

Wh

Coal generation Pc of total generation

US supply adapts to domestic demand pressures


Significant mining cuts in Central Appalachia


• Gas, plant closures dent

CAPP demand and prices

• 2012 output -20pc from

2011 and 37pc below 2008

• Mining costs in the

$60/short ton range are

in line with spot thermal

prices, driving output

toward higher-margin

coking coal

40

65

90

115

140

25

35

45

55

65

Q1-08 Q1-09 Q1-10 Q1-11 Q1-12

$/st

mn s

t

Sources: MSHA, Argus

Production 12,500 Btu, 1.6lb SO2


• “We continue to focus on our highest-margin

metallurgical coal business while idling… some

lower-quality production.”

• “Exports used to be the tail and the domestic side

was the dog, but really as we move forward the

next two or three years it is going to be split.”

-Alpha chief executive Kevin Crutchfield

CAPP increasingly a coking, export steam supplier



Northern App output down but seeks new buyers


• Output feels pinch from gas, plant retirements o Volumes -6.3pc from 2008

• Better costs may extend domestic, export reach o Longwall costs in $30-

40/st range

o Sulfur discount good for export market

o Crossover, coking coal output through Baltimore

40

60

80

100

120

140

28.5

29.9

31.3

32.7

34.1

35.5

Q1-08 Q1-09 Q1-10 Q1-11 Q1-12

$/st

mn s

t




PRB had tough 2012, improves against gas


• Output last year down 9.4pc from 2011 and 15.5pc below 2008

• High stockpiles keeping production under pressure, but PRB prices well against natural gas

• Exports a tougher move o Rail costs significant for

Canada export move

o USWC capacity tight

7

9

11

13

15

90

100

110

120

130

Q1-08 Q1-09 Q1-10 Q1-11 Q1-12

$/st

mn s

t




Exports bright spot for western bituminous


• Very significant 2012 supply

response

• Output down 21pc from

2008, 4pc from 2011

• Long haul to east less

economic; Colorado unit

closures further cut demand

• An attractive export option

o Rail to USGC

o Rail to Mississippi

o USWC exports being done

25

40

55

70

85

9.0

10.5

12.0

13.5

15.0

Q1-08 Q1-09 Q1-10 Q1-11 Q1-12

$/st

mn s

t




Illinois basin bucks price, output trends


• Low-cost longwalls adds capacity o Production up 26pc from

’08 and 9pc from 2011

o Coal Trading Association backs new OTC trading product

• Great export logistics o Rail to USGC

o Barge to Mississippi

o Sulphur watched

40

50

60

70

80

22

25

28

31

34

Q1-08 Q1-09 Q1-10 Q1-11 Q1-12

$/st

mn s

t


Production Barge 11,500 Btu, 5lb SO2

US coal supply ‘pivots’ toward the world


Steam coal lifts US exports to record 126mn st


• Thermal coal all of last

year’s export gains

o Steam +50pc yoy at 56mn

o Growth driven by Europe,

but Asia up a bit too

• Coking coal flat at 70mn st

o Rise in shipments to Asia

offsets declines to Europe

0

2

4

6

8

Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12

mn s

t

Source: US Census Bureau

Steam

Coking


Exports by major exits (122mn of total)


*US shipper capacity

Great Lakes

Tonnage 5.8mn

Change -2%

Baltimore

Tonnage 19.1mn

Change -1%

Hampton Roads

Tonnage 49mn

Change 20%

New Orleans

Tonnage 28mn

Change 32%

Texas (seaborne)

Tonnage 2.7mn

Change 397%

California

Tonnage 1.5mn

Change 6%

Pacific Northwest

Tonnage 4.9mn

Change 0%

Mobile

Tonnage 10.7mn

Change 6%


Potential build-out over next five years


West Coast

Ridley 5*

Westshore 5*

Gateway 15

Millennium 25

KM Westward 15

Ambre Morrow 8

California/other 6

Total 79

Great Lakes

Total 15

East Coast

CNX Marine 30

Curtis Bay 10

Pier IX 15

DTA 20

Lamberts Point 30

Other 1

Total 106

Southeast

McDuffie 16

Walter terminal 6

Charleston 3

Other ports 4

Total 29

Texas/New Orleans

IMT 16 Armstrong Coal 6 Burnside 7.5

United Bulk 22 LDH Energy 5-7 Other Nola 12

Convent Marine 24 Mid-stream 24 Texas 30

Total 148

US total

Grand total 377mn st

*US shipper capacity


Exporters starting to top-off Capesize vessels


• Vulcan has

done two top-

off operations

at Mobile

• CSL preparing

for first top-off

at Mobile, says

adds 60,000mt

to load


API 2 price drop shuts out many US coals


• Central Appalachian

coals having a tough

time competing

against less than

$90/mt API 2 prices

• High-sulfur Illinois

basin, Northern App

coals may be in

better position

60

80

100

120

140

Oct-11 Mar-12 Sep-12 Feb-13

$/m

t

US 12,000 Btu, less than 1pc sulfur fromHampton RoadsUS 11300 Btu, 3pc typical sulfur from NewOrleansCoal API2 index (cif ARA) Balance of weeknumber, No time stamp, index

Changes encourage new coal indexation


Railroads get flexible on export rates


• CSX links export rail

rates to API 2 coal

prices

• Set as a percentage

• The ‘bid-ask’ on the

rate: railroad wants it

at 20pc, shippers

want at 15pc


International buyers more attuned to US prices


• East and Gulf coast

terminals are key US

pricing hubs

• Spread between low-

and high-sulphur coals

closely watched in

USGC


And US sales more in tune with overseas buyers


• US coking coal exports moving away from annual

contracts to quarterly pricing and spot sales

• Alpha, maybe others aligning Central App

production more with API 2/seaborne spec

• Possible addition of lower-heat FOB mine

assessment?


• Gas competition forcing US coal producers (outside the

Illinois basin) to cut output and restrict production to the

most economic ton

• US supply and buying practices more aligned with

international markets, including increased focus on spot

purchases and alignment of quality more with API 2

contract

• Coal and transport indexation changing to accommodate

higher exports, domestic gas competition

Summary


Any questions?

Molly Christian Editor, Argus Coal Daily [email protected] +1 (202) 349-2883 Chris Newman Editor, Americas transportation and coking coal [email protected] +1 (202) 349-2876 1012 14th St. NW, Suite 1500 Washington, DC 20005 USA www.argusmedia.com

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Energy and commodity price benchmarking and market …info.argusmedia.com/uslib/ArgusWebinar_US Coals Update_Changes a… · London, Houston, Washington, New York, Portland, Calgary,