Realizing Illinois Coal Export Potential

State of IllinoisDepartment ofCommerce and Economic OpportunityOffice of Coal Development

Realizing Illinois CoalExport Potential

Spring • 2013

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Realizing Illinois CoalExport Potential

Spring • 2013

About the report’s author:

Emily S. Medine, Principal, Energy Ventures Analysis, Inc.

Emily Medine has been with Energy Ventures Analysis since 1987. Herexperience includes bankruptcy support, market strategy development, fuelprocurement audits, fuel procurement, acquisition and investment analyses,strategic studies and forecasting. She has also provided expert testimony onutility fuel procurement practices. Emily has a master’s degree in domesticenergy policy from Princeton University. For her full resume see: www.evainc.com

About Energy Ventures:

Founded in 1981, Energy Ventures Analysis is an internationally recognizedenergy consulting firm focused on the coal, natural gas, emissions andelectric power sectors. EVA's areas of expertise include energy andenvironmental forecasts, periodic multi-client reports, and analyses ofprojects for electric power utilities, fuel producers/buyers/shippers, financialinstitutions, and expert testimony in litigation and regulatory proceedings.

Realizing Illinois Coal Export Potential

Office of Coal DevelopementDiscover the Power

Table of ContentExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Global Steam Coal Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

U.S. Steam Coal Exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Reasons for Increased Illinois Basin Exports. . . . . . . . . . . . . . . . . . . . . . 4

Profile of Illinois Basin Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Transportation Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

U.S. Gulf Terminal Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Market Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Global Steam Coal Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

U.S. Steam Coal Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

How Coal Is Sold in the Export Market . . . . . . . . . . . . . . . . . . . . . . . . 16

Illinois Basin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Illinois Coal Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

U.S. Gulf Terminal Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Location of Gulf Terminals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Ocean Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Freight Booking Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Summary of Illinois Export Strategy . . . . . . . . . . . . . . . . . . . . . . . . 30

Enhancing Competitiveness of Illinois Coal Exports. . . . . . . . . . . . . 30

Marketing Support for Small Producers. . . . . . . . . . . . . . . . . . . . . . . . 31

Expanding Global Awareness of Illinois Coal . . . . . . . . . . . . . . . . . . . 31

Appendices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Appendix I: Illinois Coal Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Appendix II: DCEO International Trade Offices . . . . . . . . . . . . . . . . . 33

Appendix III: Traders Active in Illinois Basin . . . . . . . . . . . . . . . . . . . . 33

Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

1

Office of Coal Developement2

Realizing Illinois Coal Export Potential • Executive Summary

Executive Summary Illinois, which has the largest reserves of bituminous steam coal in theU.S., has the capability to produce significant quantities of coal in excessof domestic demand. This coal is well suited to the large and growingglobal coal market due to its low cost structure, access to the U.S. Gulfof Mexico (U.S. Gulf, also Gulf) for vessel loading, and the increasedability for global customers to use this quality of coal. Illinois coal hasmade significant inroads into the global market in the last two years andin so doing has contributed to the increase in exports of U.S. goods.

Exports of Illinois coal increased substantially between 2010 and 2012,from 2.5 million tons (Mt) in 2010 to 5.5 Mt in 2011 with preliminaryestimates for 2012 showing more than 13 Mt. The primary reasons for the increases were thegrowth in the global steam coal market, the marketing efforts by coal producers and traders,the increased acceptance of Illinois-quality coal, and, most importantly, the competitiveness ofIllinois coal versus alternative sources available in the global market.

In order to sustain and grow exports of Illinois coal, the Illinois Office of Coal Development(OCD) engaged Energy Ventures Analysis, Inc. (EVA) to review what activities OCD and parentagency the Department of Commerce and Economic Opportunity (DCEO) could pursue tosupport this goal. To this end, EVA developed an action plan in conjunction with OCD. Itconsists of activities categorized by timing and priority. The items included in the action planwere based upon interviews with a number of current and potential Illinois coal producers,traders, and EVA’s databases and analysis.

The recommendations fall generally into three categories:

• Those that relate to enhancing the competitiveness of Illinois coal exports,

• Those that relate to supporting smaller producers in their marketing efforts, and

• Those that relate to expanding global awareness of Illinois coal.

The competitiveness of Illinois coal is enhanced by the ability of producers to efficiently transportIllinois coal to markets throughout the world. As a result, the recommendations include:

• Selective investments to support efficiency improvements in loading coal at Illinois minesand at rail- or truck-to-barge terminals on the Mississippi and Ohio rivers,

• Financial or political support for minimized disruptions of commerce through channelimprovements on the Mississippi River, and

• Investment of resources to facilitate the loading of larger vessels to be loaded in the Gulf area.

Strategiesexist to realizeeven greaterpenetration,therebyincreasing

exports in thefuture.


Office of Coal Developement 3Discover the Power

Specialized Marketing DemandsThe marketing of Illinois coal in the export market is dramatically different than marketingIllinois coal domestically. Smaller producers, and producers without export experience, facechallenges regarding the identification of counter-parties, handling logistics of moving coal tothe typical point of sale, i.e., FOB vessel, and managing the commercial risks. Several ways inwhich the OCD can help support producers with these matters were identified.

The efforts to expand global awareness of Illinois coal can be enhanced through increased useof State trade representatives to educate potential buyers about the advantages of Illinois coaland trade missions. The State may also encourage foreign investment in Illinois coal mines,particularly where such investment may lead to exports.

Global Steam Coal MarketGlobal steam coal trade has doubled over the last decade, growing from just under 400 milliontonnes in 2002 to over 800 million tonnes1 in 2012. The growth has been driven primarily byincreased demand in Asia. Where China once was a net exporter of coal, the tables have turnedwith modernization, and China has become a net steam coal importer. Imports also have grownto South Korea, India, and other countries, underscoring the increased importance of the Pacificmarket.

During this period, Indonesia became the largest source of steam coal supply, growing fromaround 70 million tonnes of exports in 2002 to over 300 million tonnes of exports in 2012. Theother major exporters of steam coal are Australia, Russia, South Africa and Colombia. Exportsfrom the U.S. grew in 2011 and 2012 reflecting a combination of the strong global market, theweak U.S. market, and the competitiveness of U.S. coal supplies from non-traditional exportsources including the Illinois Basin.

1 Tonnes or metric tonnes contain 2204.6 pounds. Tons or short tons contain 2000 pounds. Most discussion ofinternational coal is on a tonne basis; most discussion of U.S. coals is on a ton basis. Both of these terms are usedthroughout the report as appropriate to their context.

Top Coal Exporters (2011e) Steam Coal

Tonnage

Indonesia 309Mt

Australia 144Mt

Russia 110Mt

USA 34Mt

Colombia 75Mt

South Africa 72Mt

Kazakhstan 33Mt

Sources: Source: www.worldcoal.org, EIA

(e = estimated) (Mt = Million tonnes)

Top Coal Importers (2011e) Steam Coal

Tonnage

PR China 146Mt

Japan 121Mt

South Korea 97Mt

India 86Mt

Chinese Tapei 62Mt

Germany 32Mt

UK 27Mt

Sources: Source: www.worldcoal.org, EIA

(e = estimated) (Mt = Million tonnes)



U.S. Steam Coal ExportsCoal is typically categorized by end use. Steam, or thermal coal is used in boilers to producesteam for electricity generation and in industrial applications. Metallurgical coal is used as afeedstock in the production of coke which is used in traditional steel production as a fuel andreducing agent to smelt iron ore in a blast furnace. The important quality characteristics insteam coal are sulfur content, ash, calorific value, and volatility. The quality characteristicsimportant in metallurgical coal are sulfur, ash, volatility, and fluidity. While some coals are cross-over coals and can move into both markets, many coals are limited to one market.

Historically, exports of U.S. steam coal originated primarily from Appalachia due to acombination of quality characteristics and proximity to East Coast and Great Lakes ports. Thishas changed as consumers have become more flexible with regard to coal quality specifications,and the market has shifted away from North and South America to Europe and Asia. In 2012,about half of U.S. steam coal exports moved through the U.S. Gulf. Almost 70% of steam coalexports through the Gulf originated from the Illinois Basin.

Reasons for Increased Illinois Basin ExportsThe growth in exports from the Illinois Basin is due to three primary factors:

• Increased ability to use Illinois Basin coal which is higher in sulfur than coals historicallytraded in the global market,

• Concentrated marketing efforts by producers and traders, and

• Relative competitiveness of Illinois Basin coal versus coals from other producing nations.

0

5,000

10,000

15,000

20,000

25,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tons (1000) Exports of US Steam Coal from East Coast and Gulf Ports

Mobile (Gulf)Houston (Gulf)Bal more (Atlan c)Hampton Roads (Atlan c)New Orleans (Gulf)

Department of Commerce, EVA



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The result is that Illinois coal has been shipped to at least 18 countries in 2011 and 2012,including Canada, Mexico, Dominican Republic, and Chile in the Americas; Belgium, Denmark,Finland, France, Great Britain, Germany, Holland, Ireland, Portugal and Spain in Europe; andChina, India, Pakistan, and South Korea in Asia.

Profile of Illinois Basin ProductionThe Illinois Basin consists of the coal-producing areas in Illinois, Indiana, and Western Kentucky.The coal is all bituminous, sold as “steam” to the electric power sector, with an average heatcontent ranging from 10,000 to 12,500 Btu/pound and mostly over 2% sulfur. The Illinois Basinhas experienced enormous changes over the last two decades as production declined from thepeak levels experienced in 1990 of over 140 million tons to a low of 88 million tons in 2003. Thedecline reflected the combination of new air pollution control requirements and penetration ofCentral States markets with low-sulfur coal from the Powder River Basin of Wyoming. However, acoal renaissance in the Illinois Basin began in the middle of the last decade as a result ofincreased domestic demand. Production within the basin gradually shifted during the timeframe, away from output from Indiana surface mines to the benefit of underground mines inIllinois, where producers have increased the use of cost-effective longwall mining.

The increased U.S. demand noted above was also driven by the gradual retrofit andmodernization of the nation’s coal fleet, primarily the addition on many existing power plants ofso-called “scrubbers,” or flue gas desulfurization (FGD) equipment. The improved emissionscontrols have allowed an increasing number of Midwest and Eastern power producers to switchto Illinois Basin coal, or, in some cases, switch back to Illinois Basin coal. This domestic growthhas also been augmented in recent years by the development and growth of an export market.

Over the last 10 years, Illinois’ share of production has ranged between 32% and 38% of totalBasin production. In 2012, 10 producers operating 22 mines accounted for all of Illinois coalproduction. The three largest producers, Foresight Energy, American Coal and Peabody Energy,

Illinois coal delivered to destinations abroad. Map not intended to show routings.



accounted for over 70% of 2012 Illinois production. Since 2010, 10 new mines have beendeveloped, or are in developing stages in Illinois. At full production, the announced new mineswould add over 40 million tons of annual production capacity. Four of the new mines arelongwall mines, each of which is expected to produce between 6.0 and 8.0 million tons peryear. The growth in Illinois production is greater than the projected growth in the other parts ofthe Illinois Basin. As a result, Illinois’ share of total production is expected to continue to leadBasin tonnage growth over time.

The potential increase in Illinois coal supply exceeds domestic demand requirements. As aresult, in order for this growth to be realized exports of Illinois coal need to be expanded.

Transportation OptionsIllinois coal could move to overseas destinations through the Gulf of Mexico, Great Lakes, orPacific Northwest, although all exports are currently through the Gulf. The exports through theGulf involve barging or rail shipping Illinois coal to the Gulf. The barged coal is unloaded at Gulfterminals for reloading into vessels or loaded directly onto the vessels through a process knownas “midstreaming”. The railed coal moves to Gulf terminals where it is unloaded and thenloaded into vessels.

Exports move through the Gulf because of the currently high rail freight costs to both the GreatLakes and the West Coast, compared to the relatively low cost and availability of ocean freight inthe Gulf. The attractiveness of the Gulf for exports will be enhanced in 2015 when the expansionof the Panama Canal is complete. The new channel will accommodate what are being referred toas “Post Panamax” or “New Panamax” vessels, which are larger than the vessels the existingPanama Canal can accommodate. Expectations are that the Post Panamax vessels will be able tocarry 125,000 tonnes.

Illinois coal is loaded on to barges for transportation to the Gulf for overseas destinations.



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U.S. Gulf Terminal OptionsThe major Gulf terminals are McDuffie in Mobile; International Marine Terminal (IMT), UnitedBulk Terminal (UBT), and the IC Marine Terminal in New Orleans. IMT is owned by KinderMorgan. IC Marine is owned by Foresight Energy. UBT was bought by Oiltanking HoldingAmericas. Additional investment is underway. The largest investment is by Trafigura with itspurchase of the Burnside Terminal. Trafigura has plans to turn the facility into a state-of-the-artbulk terminal. Phase One provides for barge to vessel; Phase Two will add rail to vessel.

The export capacity through the Gulf has been greatly expanded through the midstreamloading of vessels. In midstream loading, an ocean-going vessel is tied to permanent buoys.Coal is unloaded from barges into the vessel with floating cranes. Three companies (AssociatedTerminals, St. James Stevedoring and Cooper/Consolidated) have developed significantmidstream loading capabilities in the Gulf.

Market StrategiesSales to end users are generally made on the basis of what is called Free On Board-Trimmed(FOBT), meaning all costs of shipping from the mine to the Gulf and loading on a vessel must behandled by the coal producer or seller. A seller also can handle these logistics by selling the coalFree On Board (FOB) at the mine, using coal traders or other third parties to move and load theproduct. The two largest Illinois coal producers typically handle the logistics from the mine to thevessel by themselves. Other producers generally sell FOB mine/FOB barge to traders.

A large number of traders are participating in Illinois Basin coal trades. Traders believed to beactive in this market include E.ON, EDF, Coeclerici, Glencore, Goldman Sachs (J. Aron), JPMorgan, Mercuria, RWE Trading, Trafigura and Vitol. Traders have been instrumental indeveloping the export market for Illinois coal because of the breadth of their market access,their ability to manage logistics and/or their willingness to commit to purchase tonnage as partof their trading “book” of coal rather than for a specific customer. Traders also can play asignificant role by improving the counter-party credit risk of dealing with far-away buyers, a riskthat can be substantial when selling coal overseas.

Gulf Coast – Exis�ng and OngoingTerminal Project Capacity

International Marine Terminal Shiploader repair finished,

expansions 2012-2014

From 1.5 million in 2011 to

13-14 million in 2014

IC Rail Marine Terminal Cline purchased, doubling

capacity From 3.5 to

8 million st/yr

Burnside Terminal

Trafigura spending $128mn for rail- and barge-served facility. Coal shipments to start spring

2012

3 million st/yr by 2013, top end of 10 million st/yr

Mobile River Terminal Walter shifting away from coke

and iron ore 3 million st/yr

McDuffie Terminal 1 of 3 berths dedicated to

export

10-12.5 millionst/yr

Kinder Morgan's Deepwater Terminal

Petroleum coke switch to coal with new shiploader, loop

track

From 2 to10 million

Global SteamCoal Trade


Realizing Illinois Coal Export Potential • Global Steam Coal Trade

Global Steam Coal TradeAs referenced earlier, steam or thermal coal is used primarily for electricity generation and inindustrial applications. Metallurgical coal is used as a feedstock in the production of coke whichis used in traditional steel production as a fuel and reducing agent to smelt iron ore in a blastfurnace.

In 2011, world coal production exceeded 7.6 billion tonnes. While most coal is consumed in thecountry in which it is produced, both metallurgical and steam coals are traded in theinternational market. For 2011, the International Energy Agency (IEA) estimated world coal tradeto be over 1.1 billion tonnes, comprised of 861 million tonnes of steam coal and 276 milliontonnes of metallurgical coal. The seaborne coal trade tonnage is about 90% of total export salesworldwide; the remainder of the cross-border trade is done overland, usually by rail.

The seaborne steam coalmarket has increased fourfoldsince 1990. While Europe andJapan accounted for the bulkof demand until 2000, Asiaprimarily has accounted forthe growth in the last decadeor so. On the supply side,Indonesia has become thedominant world supplier ofsteam coal, while Australia,South Africa, and Colombiaare other significantcompetitors to the fastgrowing U.S. export trade.

The outlook for future steamcoal trade is highly dependenton cost, relative to othersources of energy, and uponthe types of emissionsreduction and limitationpolicies put in placethroughout the world. In itsmost recent energy outlook,the IEA considered threescenarios, all of whichconclude that world coaldemand will continue growingthrough 2020.2 Thereafter,only one of the three scenariosshows a decline in demandbetween 2020 and 2035. IEA’s

Million MetricTons Seaborne Steam Coal Trade – Demand

-

100

200

300

400

500

600

700

800

1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012EJapan Europe South Korea China Other

Source: Simpson, Spence & Young (Ship Brokers)

Indonesia Australia South Africa ColombiaU.S. Other

Million MetricTons Seaborne Steam Coal Trade – Supply

0

100

200

300

400

500

600

700

800

900

1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012E

Source: Simpson, Spence & Young (Ship Brokers)

2 World Energy Outlook 2012 (OECD/IEA)



Current Policies and New Policies scenarios reflect an annual average growth in coal demand of1.7% and 0.65%, respectively from 2010 through 2035. Growth in steam coal trade isexpected to outpace growth in total demand. The corresponding forecast of steam coal tradeunder the New Policies’ scenario, for example, calls for an annual average increase of 1.4%.

The growth in coal demand and coal trade is largely tied to the expected addition of thousandsof megawatts of coal-fueled electric generating capacity throughout Asia. Even in nations thatproduce coal themselves, growing demand for imported coal will reflect the fact native sourcesof coal are not likely to be able to keep pace with growth. In addition, in coal exporting nationssuch as Indonesia and Vietnam, growth in domestic demand will decrease the tonnage thosenations will have available for export.

Ultimately, two countries will drive overall demand growth in coal trade: China and India. Bothcountries have significant coal-fired generating capacity, and both countries have plans forsignificant capacity additions. While China ranks first in global coal production and India ranksthird, both countries have become significant importers of steam coal. Most forecasters expectincreased imports by India as domestic production and infrastructure requirements have notkept pace with demand. Further, the quality and location of coal mined in India and China hasmade imports both competitive and, in a number of cases, preferable. Not surprisingly, Indiancompanies have been investing significant amounts of capital to purchase coal reserves or takeequity positions in multi-national mining companies in Australia, Indonesia, Mozambique, andto a limited extent in the U.S.

The picture in China is more complicated because of its size. China produced over 3.5 billiontonnes of coal in 2012. Net 2012 steam coal imports (imports minus exports) are estimated tobe over 150 million tonnes. While very significant to the global steam coal market balance, the

net steam coal importsaccount for a relativelysmall share of total Chinesecoal production andconsumption. This meanseven small movements inChina’s coal consumptionor production volumes cansignificantly affect theglobal steam coal marketbalance.

3 The New Policies Scenario “takes into account broad policy commitments and plans that have already beenimplemented to address energy-related challenges as well as those that have been announced, even where thespecific measures to implement these commitments have yet to be introduced.” (WEO 2012, page 34)

Million MetricTons

(300)

(200)

(100)

0

100

200

300

1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012E

Chinese Steam Coal Exports and Imports

Exports Imports Net ExportsSource: Simpson, Spence & Young, EVA

China has become a large import nation for coal, after history ofChinese coal being sent overseas.



U.S. Steam Coal ExportsCoal production in the U.S. in 2012 is estimated to be just over 1.0 billion tons. Coal is producedin multiple supply regions throughout the country. The coal quality varies by supply region.Higher heat-value bituminous coals are produced in the Appalachian Region, the Illinois Basin,and the Rocky Mountains (primarily Utah and Colorado). Lower heat-value sub-bituminous coalscome from the Powder River Basin of Wyoming, the Northwest, and parts of the Southwest. Aneven lower grade coal, lignite, is produced in the Gulf Coast state, parts of Texas and in NorthDakota.

Historically, the primary source of U.S. steam coal exports has been Appalachia. This is due tothe quality of the coal and the proximity of the mines to the East Coast ports and Great Lakes,which were the logical exit points for the U.S. coals moving to Europe and Canada. In recentyears, the U.S. has exported coal from all major supply regions (i.e., Northern, Central, andSouthern Appalachia, the Illinois Basin, the Powder River Basin, and the Rockies) as well as theNorthwest (i.e., Alaska).

U.S. Coal Supply Regions



In the last two years, the U.S. has become a net exporter of steam coal. The initial decline inimports reflected the higher market value for the coals typically imported into the U.S., most ofthe high-quality coal coming from Colombia. The import-export balance has been reversed inthe steam coal trade, reflecting a combination of factors, including an excess of U.S. coalproducing capacity, led by increased availability of coal for export from non-traditional sourcessuch as from the Illinois Basin and the western U.S.

The composition of the steam coal exports by port is shown on page 13 for 2012 and 2011. Allthe major U.S. coal supply regions participated in the export steam coal market. Just over one-third of the exports in the 2012 months originated from Central Appalachia. Just under 30% ofthe exports originated from the Illinois Basin. New Orleans handled about 40% of all steam coalexports during this period.

U.S. Steam Coal Imports and Exports

Stea

m C

oal E

xpor

ts a

nd Im

port

s (’0

00 to

ns)

60,000

50,000

40,000

30,000

20,000

10,000

02001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Steam Coal ExportsSteam Coal Imports

Source: Department of Commerce, EVA



NAPP = Northern Appalachian CAPP = Southern Appalachian ILB = Illinois Basin PRB = Powder River Basin

Steam Coal Exports by Port and Supply Region

Change fromYear 2011 to 2012

2011 2012 Tons %Bal more 2,013 52.9%NAPP 2,013 52.9%Hampton Roads 7,770 103.2%CAPP 7,770 103.2%Mobile 692 121.7%ILB 692 121.7%New Orleans 7,079 45.0%CAPP 1,003 26.5%NAPP 49 10.3%ILB 5,675 57.8%PRB 403 130.2%Rockies -51 -3.7%Texas Gulf 2,165 592.5%Rockies 2,165 592.5%Great Lakes 77 2.9%NAPP -161 -76.8%PRB -1,019 -44.4%Rockies 1,257 --Mexican Border 232 77.0%Rockies 232 77.0%West Coast 305 4.9%PRB -189 -4.2%Rockies 493 29.0%Alaska -169 -15.9%

Total 20,165 52.8%CAPP 8,773 77.5%NAPP 1,901 42.3%ILB 6,367 61.3%PRB -804 -11.3%Rockies 4,096 106.5%Alaska

5,8205,82015,29715,2971,2611,26122,8274,790523

15,4887131,3122,5312,5312,69649

1,2751,3725325326,5354,3382,197892

58,39120,0876,39216,7496,3277,944892

3,8073,8077,5277,527569569

15,7483,7874759,8133101,3633653652,6192102,2941153013016,2304,5271,7041,061

38,22611,3144,49110,3827,1303,8481,061 -169 -15.9%

(1000 Tons)



The primary market for U.S. steam coals is Europe. Asia, which had effectively disappeared as amarket, returned in a meaningful way over the last three years. South America is also a growingmarket for U.S. coals. Canada has all but disappeared as a market because of a policy decision bythe province of Ontario to require the closure of Ontario Power Generation’s coal-fired plants.

The markets vary by port. Most of the steam coal exports from the West Coast move to Asia.Most of the steam coal exports from the East Coast move to Europe. The steam coal exportsfrom the Gulf (New Orleans and Mobile) are more mixed with about 10% going to Asia and15% to South America. The primary market is Europe.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tons (1000) Annual Steam Coal Exports by Des na on

Canada

South America

Asia

Europe

Source: Department of Commerce, EVA



Steam Coal Exports by Port and Des�na�on

Change fromYear 2011

2011 2012 Tons %Bal�moreCanada 46.2%Europe/Africa -0.7%South America 61.9%Asia --TOTAL 52.9%Hampton RoadsCanada 0.0%Europe/Africa 107.3%South America -88.8%Asia --TOTAL 103.2%MobileEurope/Africa 96.2%South America 121.1%Asia 0.0%TOTAL 121.7%New OrleansEurope/Africa 35.6%South America 4.0%Asia 413.7%TOTAL 45.0%Texas GulfEurope/Africa 430.4%Great LakesCanada -41.2%Europe/Africa 273.1%TOTAL 2.9%Mexican BorderSouth America 77.0%TOTAL 77.0%West CoastCanada --Europe/Africa -99.8%South America 133.4%Asia -3.1%TOTAL 4.9%AlaskaSouth America -31.6%Asia 21.3%TOTAL -15.9%TotalCanada -22.4%Europe/Africa 62.2%South America 21.7%Asia 68.2%TOTAL

3123,3683251,8155,820

11414,95034199

15,297

9641721261,261

16,8242,8283,17522,827

1,938

1,3231,3722,696

532532

100

9415,5846,535

511381892

1,91239,4165,78211,28058,391

2133,3922010

3,807

07,21130312

7,527

491780

569

12,4102,719618

15,748

365

2,2513682,619

301301

0644035,7636,230

7463151,061

2,46424,3024,7516,70838,226

99-251241,8152,013

07,739-2691877,770

472940

692

4,4131092,5577,079

1,573

-9271,00477

232232

10-64538-179305

-23667-169

-55215,1141,0314,57220,165 52.8%

(1000 Tons)



How Coal Is Sold in the Export MarketThe coal industry is very competitive due to the relative ease of entry into the mining business.Further increasing competition is the fact that significant quantities of coal are sold throughtraders, whose role it is to pursue marketing opportunities wherever they may exist. There arebasically two types of suppliers: producers and traders. Producers mine and market their ownproduct, although the marketing is often done by sales companies established by theproducers. Traders are entities which buy/sell product for and from third parties. Traders varywith respect to the risk they might assume. Some minimize risk by doing all transactions on aback-to-back basis, i.e., for each sale a corresponding purchase is made. Others have a large“book” of coal sold or ordered, and look to match supply/demand on a real time basis tomaximize profits. Some traders are also producers and use their own production to supporttheir trades.

Coal sold into the export market is generally sold FOBT at a port or CIF.4 FOBT stands for “free onboard” and “trimmed” means ownership of the coal is passed as the fuel is loaded into the vessel.CIF stands for Cost-Insurance-Freight and means that the fuel is sold delivered to a destinationport and title transfers as the coal is offloaded from a rail car or barge. With FOBT purchases, thebuyer is responsible for the ocean freight. With CIF purchases, the seller is responsible for thefreight. There are variants still falling within the two major categories above. Similar to FOBTmight be a deal labeled FOB (Free on Board) or Free Along Side (FAS). Akin to CIF are dealsdescribed as Cost and Freight (CFR), Delivered ex Ship (DES) and Delivered ex Quay (DEQ).

The sale of coal FOBT or CIF is dramatically different than selling coal, as is often done in thedomestic market, under FOB railcar or FOB barge, neither of which makes the coal producerresponsible for having the coal delivered to the vessel. Delivery involves barging or railing thecoal to the export terminal, plus the transfer from the barge or rail into the vessel. If sold CIF,this also includes the ocean freight. As one might imagine, given the options of pricing, thedollars involved are considerable, mandating a need for expertise in their negotiation. Traders,which buy coal on both an FOB mine/barge basis and FOBT basis, can be used by smallerproducers to provide these logistics and experience.

As with domestic sales, contracts are used to document the terms of any agreement. Thecounter-parties in the fuel purchase agreements are either the producers or their respective salescompanies/agents or traders. Standard agreements are available through a number of groupssuch as globalCOAL.5

Coal sold into the global market can be sold on either a fixed price or indexed basis. A numberof coal indexes have been developed over the years to allow for both physical and financialtrading. The traded indices include API2 and API4. API, which stands for All Publications Index,was intended to be an average of prices from several published sources. In actuality, it is asimple average of only two sources for API2 and three sources for API4. API2 represents thedelivered price of steam coal to Amsterdam-Rotterdam-Antwerp (which is widely considered tobe the gateway to Europe). It is derived by averaging published pricing from two publications:McCloskey and Argus. API4 is the price of South African coal FOB Richards Bay Terminal, thatnation’s major coal port. API4 is the average of three publications: McCloskey, Argus and SouthAfrican Coal Report.

4 Parties typically rely on Incoterms which are a series of pre-defined commercial terms published by the InternationalChamber of Commerce (ICC) that are widely used in International commercial transactions.

5 globalCOAL uses the Standard Coal Trading Agreement referred to as SCoTA.



While some coal is actually traded at these indices, coal is more often traded at a premium, or adiscount to the indices. Nevertheless, API2 and API4 serve as good indicators of marketconditions over time. As all global coal trade is done in terms of U.S. dollars, that is the currencybase for both the API2 and API4.

API2 and API4 are traded on both a prompt and forward basis. Prompt pricing is the price todayfor delivery in the next 90 days. Forward pricing is the price today for a delivery at some futuretime. Forward pricing can be by quarter or calendar year. For example, in April 2013 abuyer could bid, at prompt pricing, for coal being delivered in the third quarter of 2013 or atforward pricing for delivery in the Q4 of 2013, Q1 of 2014, and Q2 of 2014. Or the deal mightbe for an entire calendar year of 2014 or 2015. The collection of the forward prices forms whatis referred to as the forward price curve.

There are liquid, or meaningful indexes for only three U.S. coals: 1) 12,000 Btu/lb CentralAppalachian Big Sandy barge coal; 2) 12,500 Btu/lb Central Appalachian CSX rail coal; and 3)Powder River Basin 8,800 Btu/lb coal. All three products trade under a standardized contract inthe physical over-the-counter (OTC) market. They also trade under the contractual and creditguarantee of the New York Mercantile Exchange (NYMEX). Some parties have started to offercertain U.S. coals, including coals from the Illinois Basin, on an index base tied to API2 or API4.This strategy is in recognition that many international buyers are accustomed to purchasingcoal in this manner. Most recently, the Coal Trading Association has approved an Illinois Basinover-the-counter product FOB the Ohio River between mile markers 776.1 and 918.5. Thequality specifications are 11,400 Btu/lb, 5.5 pounds SO2/MMBtu, and 0.35% max chlorine. Ifthis index becomes liquid (i.e., is traded in sufficient quantities), exports from the Illinois Basincould benefit.

There are advantages to parties selling or purchasing coal tied to liquid indexes. Principalamong them is the ability to finance, or otherwise bond their deals through financialinstruments offered by banks, or oftentimes by producers/traders themselves. As each party canutilize its own hedging strategies, it is not unusual for there to be a divergence between what aproducer/trader is realizing in the sale of the coal and what a buyer/consumer is paying for it.

Illinois Basin


Realizing Illinois Coal Export Potential • Illinois Basin

Illinois BasinOverviewThe Illinois Basin consists of the coal-producing areas in Illinois, Indiana, and Western Kentucky.The coal which is mined from the same geological formation is classified as bituminous, with anaverage heat content ranging from 10,000 to 12,500 Btu per pound. Most have sulfur contentover 2%. The Illinois Basin has experienced enormous changes over the last 20 years.Production fell from a peak of 140 million tons in 1990 to a Basin-wide low of 88 million tons in2003. The decline reflects the combination of new air pollution control requirements andpenetration of Illinois Basin markets by low-sulfur coal from the Powder River Basin. From themid-2000s on, there has been a renaissance in the Illinois Basin. It resulted from increaseddomestic demand combined with a shift in production from surface to underground mines and,ultimately, to increased use of high-efficiency longwall mining.

Longwall mining is an underground mining technique which provides for greater seamrecovery. Not all coal seams are suitable for longwall mining. All of the mines in the Illinois Basinusing longwall mining, or planning to use longwall mining, are within Illinois. The increaseddomestic demand is due to the retrofit of flue gas desulfurization (FGD) equipment, also knownas scrubbers, on many existing power plants enabling them to switch to or switch back toIllinois Basin coals.

The production shifts have also improved the relative cost structure of Illinois Basin coal. Theunderground mines have generally been more cost efficient than the surface mines theyreplaced. Further, longwall mining, where it is used, tends to be even lower in cost because itcan achieve high volumes and greater seam recovery.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tons (1000) Illinois Basin Produc�on by Mine Type

Longwall Con�nuous Miner Surface

The mix of Illinois Basin coal production has also been shifting during this period. In 2003,Indiana accounted for the largest share of Illinois Basin coal due primarily due to demand forlow sulfur coal that was produced exclusively at several Indiana coal mines. In the last few years,Indiana’s prominence has been declining, first in favor of Western Kentucky and more recentlyin favor of Illinois. In 2012, Illinois coal accounted for 34% of Illinois Basin production. Therecent growth in Illinois reflects the significant investment made by Foresight Energy over thelast decade as well as the new Prairie State Mine complex.

Illinois Coal ProductionIllinois coal production is concentrated in the southern and central parts of the state. All of theClass I rail carriers operate within the state. Those logistic advantages, plus the industry’sexceptional access to the Ohio and Mississippi rivers, gives Illinois mines unquestionedadvantages in export trade participation.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tons (1000) Illinois Basin Produc�on by State

IL IN WKY



Office of Coal Developement 21Discover the PowerDiscover the Power

Over 80% of 2012 Illinois coal production is from underground mines. About 50% of totalproduction in 2012 is from longwall mines.

In 2012, 10 producers operating 22 mines accounted for the vast majority of Illinois coalproduction, with Foresight Energy and Peabody Energy accounting for nearly 50% of the coaloutput in 2011 and 2012. Several new mines, under development in recent years, producedsome initial tonnage in 2012.

As referenced earlier, other new mines are at various stages of development, showing continuedinterest in potential within Illinois and across the Illinois Basin. Also on the horizon is an Illinoiscoal production base that has more than 75% coming from longwall mines.

Part of the forecast is a widely expected shakeout, signaled by the recent closure of the 3million ton Peabody Willow Lake Mine in Saline County and cutbacks at Foresight’s Shay Minein Macoupin County. Ultimately, supply and demand will need to balance. As a result,production will be adjusted to market levels, which could include mine closures, temporaryidling, and/or schedule changes.

0

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20,000

30,000

40,000

50,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tons (1000) Illinois Produc�on by Mine Type

Longwall Con nuous Miner SurfaceSource: MSHA, EVA


The operator uses remote control to maneuver the front of the continuous miner into position to cut coal that is thenunloaded from the back onto a waiting haulage vehicle.

Company Mine S/U Type 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Alcoa Friendsville S 333 96 17 339 938 1,037 978 997 1,213 1,439Alliance Resource Pa�ki U CM 337 0 0 0 0 0 0 0 0 0Alliance Resource Pa�ki #2 U CM 1,485 2,440 2,635 2,505 2,897 2,653 2,473 1,657 2,199 2,380Arch Coal Viper U CM 2,133 2,123 2,332 2,085 2,090 2,261 2,252 2,475 2,098 2,108Eagle River Coal Eagle River S 0 0 0 0 0 0 0 0 301 625Exxon Monterey #1 U LW 3,008 3,051 3,008 2,767 2,134 0 0 0 0 0Foresight Energy Hillsboro/Deer Run U LW 0 0 0 0 0 0 0 21 491 2,365Foresight Energy Shay #1 U CM 0 0 0 0 0 0 168 1,027 1,829 1,702Foresight Energy Sugar Camp A/M-Class U LW 0 0 0 0 0 0 0 324 856 4,690Foresight Energy Mach #1 U LW 0 0 0 94 1,074 5,504 5,921 5,795 7,227 7,528Founda on Coal Wabash U CM 1,567 1,665 1,726 1,175 386 0 0 0 0 0Horizon Zeigler #11 U CM 2,557 1,786 0 0 0 0 0 0 0 0Knight Hawk Creek Paum S 1,401 1,416 1,401 1,408 1,174 1,068 557 650 381 92Knight Hawk Fidelity S 0 133 88 0 305 61 0 0 0 0Knight Hawk Black Hawk S 0 0 0 0 0 0 0 0 0 159Knight Hawk Hawkeye S 0 0 0 0 0 0 0 0 140 438Knight Hawk Old Ed #21 W 0 0 0 0 106 95 125 34 58 82Knight Hawk Prairie Eagle S 0 0 389 676 359 433 472 270 307 202Knight Hawk Prairie Eagle South U CM 0 0 0 0 0 0 166 844 959 981Knight Hawk Prairie Eagle UG U CM 0 0 0 65 447 1,112 1,720 1,573 1,751 1,857Knight Hawk A M No. 3 S 18 73 39 28 31 24 15 4 0 0Knight Hawk Red Hawk S 375 505 675 709 661 660 505 510 533 514Knight Hawk Royal Falcon U CM 0 0 0 0 19 196 367 0 0 0Knight Hawk Jordan W 0 0 0 0 0 0 0 0 0 43Murray Energy New Era U LW 6,011 6,518 5,914 7,214 7,009 5,263 6,267 5,775 4,963 5,642Murray Energy New Future Mine U LW 0 0 0 0 0 0 0 617 1,783 3,642Peabody Wildcat Hills S 2,529 2,747 2,643 2,046 2,070 2,231 2,117 2,128 1,897 1,997Peabody Gateway U CM 0 0 508 2,439 2,695 3,198 3,348 3,198 3,335 2,766Peabody Riola U CM 824 1,000 921 204 0 0 0 0 0 0Peabody Vermilion Grove U CM 962 1,311 1,497 1,224 1,375 1,130 215 0 0 0Peabody Wildcat Hills UG U CM 0 0 0 494 848 709 702 749 1,018 1,458Peabody Willow Lake U CM 2,854 3,412 3,690 3,639 3,477 3,621 3,447 2,920 2,235 2,086Prairie State Lively Grove U CM 0 0 0 0 0 0 0 0 1,002 2,819Springfield Coal Crown II U CM 1,368 1,369 1,565 1,326 843 0 0 0 0 0Springfield Coal Crown III U CM 2,169 1,895 1,871 1,590 1,511 1,408 1,360 1,311 935 811Springfield Coal North Grindstone S 0 0 0 0 0 0 137 195 166 184Western Fuels Liberty U CM 701 663 718 298 0 0 0 0 0 0Other 1,119 168 502 404 405 410 702 301 129 92TOTAL 31,753 32,370 32,139 32,729 32,855 33,074 34,014 33,377 37,805 48,703

Historical Illinois Produc on by Mine (1000 Tons)



An operator leans against a piece of longwall mining equipment atMach No. 1 Mine in southern Illinois. New longwall mines are making

Illinois coal price-competitive in the global steam coal market.

Transportation

Realizing Illinois Coal Export Potential • Transportation


TransportationOverviewIllinois coal could move to overseas destinations through the Gulf of Mexico, Great Lakes, orPacific Northwest ports, although all of the overseas coal is currently moving through the Gulf(New Orleans and Mobile).

The exports through the Gulf involve barging or railing Illinois coal to the Gulf. The barged coal isloaded at one of the many river terminals located on the Mississippi and Ohio rivers. The coal isthen barged to one of several Gulf terminals where it is unloaded, then reloaded into ocean-goingvessels. It can also be unloaded directly from the barge into ocean-going vessels through aprocess known as "midstreaming".

Coal moving by rail to the Gulf terminals is unloaded, then reloaded into vessels. Not allterminals are railroad served. International Marine Terminal (IMT) has plans to extend the NewOrleans and Gulf Coast Railway (NOGC), a former branch line of the Union Pacific, into theterminal. Trafigura’s Phase II project at the Burnside Terminal includes access to the CanadianNational (CN).

Exports through the Great Lakes would involve railing coal to a lake terminal, most likely inChicago, and loading the coal into limited-sized vessels known as “lakers.” While lakers aredesigned to meet the limitations of the locks and channels that dot the Great Lakes system,they have the capability to move directly to certain export destinations. More commonly,export coal on the Great Lakes and St. Lawrence Seaway system is transloaded into ocean-goingvessels at the head of the system in Quebec. Currently, considerable quantities of Powder RiverBasin coal, along with Midwest-produced petroleum coke (an oil refinery byproduct that iscoal's competitor), move into export channels through the Great Lakes-St. Lawrence system.

While exports through the West Coast terminals are possible, they are not a practical option.Reaching Pacific ports in Canada, or even one of those planned for the Pacific Northwest, wouldinvolve a long rail haul that is likely to be price-prohibitive for years to come.



Terminal Owner/Operator Location River MP Rail Access Current Additions Status

McDuffie Coal State of Alabama Mobile, AL CN/CSX 30

Operating

International Marine Kinder Morgan Myrtle Grove, LA Mississippi, MP57 None but NOGC plans to extend to IMT

6 6 Operating

Armstrong Coal Armstrong Coal LA Mississippi, MP61 UP via NOGC 0 6-10 Planned

United Bulk Terminal Oiltanking Davant, LA Mississippi, MP55 Barge 11 6 Operating

Convent Marine Foresight Energy Convent, LA Mississippi, MP 161

CN 5 3 Operating

Burnside Impala (Trafigura) Burnside, LA Mississippi, MP 170

CN in Phase II 0 7-14 Under Construction

Corpus Christi State of Texas Corpus Christi, TX

UP 0 2 Under Development

Port of Houston Port of Houston/ Kinder Morgan

Houston, TX BN/UP 5 2 Operating

Capacity (Million TPY)Gulf Terminals

Gulf Coast ports, by comparison, are reachable at a relatively low cost, with an option of rail orbarge freight. The Gulf further offers an availability of ocean freight. The attractiveness of theGulf for exports will be further enhanced in 2015 when the expansion of the Panama Canal iscomplete. The new channel will accommodate what are being referred to as “Post Panamax” or“New Panamax,” which can transverse the widened Panama Canal with loads up to 125,000tonnes.

U.S. Gulf Terminal OptionsAs shown in the accompanying chart, the major Gulf terminals are McDuffie in Mobile;International Marine Terminal (IMT), United Bulk Terminal (UBT), and the IC Marine Terminalnear New Orleans. IMT is owned by Kinder Morgan. IC Marine is owned by Foresight Energy.UBT was bought by Oiltanking Holding Americas. Additional investment is underway. Thelargest investment is by Trafigura with its purchase of the Burnside Terminal. Trafigura has plansto turn the facility into a state-of-the-art bulk terminal. Phase One provides for barge to vessel;Phase Two will add rail to vessel.



Midstream Operator Location CapacityAssociated Terminal Between Mile 56.8 and

141 on lower MSSeven floating cranes

St. James Stevedoring Anchorages at Elmwod (Mile 122)

Eight high capacity floating cranes

Cooper/Consolidated 11 anchorages located between NOLA and Baton Rouge

12 high capacity cranes

Midstream Opera�ons

(Mile 158) and Artco

Location of Gulf Terminals

Gulf Coast – Exis�ng and OngoingTerminal Project Capacity

Shiploader repair finished, expansions 2012-2014

From 1.5 million in 2011 to

13-14 million in 2014

Cline purchased, doubling capacity

From 3.5 to 8 million st/yr

rail- and barge-served facility.

2012

3 million st/yr by

10 million st/yr

and iron ore 3 million st/yr

1 of 3 berths dedicated to export

with new shiploader, loop track

The export capacity through the Gulf has been greatly expanded through the midstreamloading of vessels. In midstream loading, an ocean-going vessel is tied to permanent buoys.Coal is unloaded from barges into the vessel with floating cranes. Three companies (AssociatedTerminals, St. James Stevedoring and Cooper/Consolidated) have developed significantmidstream loading capabilities in the Gulf.



Midstream anchorages allow stevedoring, or "loading or unloading ocean vessels" economically withoutshoreline facilities.

Ocean FreightCoal for export often is sold CIF, or Cost-Insurance-Freight. If coal is sold CIF, it is the supplier’sresponsibility to obtain freight. A contract for ocean freight, which is referred to as either aCharter Party or a Contract of Affreightment (COA), is typically with ship owners. The freightcontract, which is referred to as a Charter Party, can be for a single movement, for a portion ofa deal or for all freight requirements over one or more years.

The larger ship owners include Cargill, Daiichi, Dreyfus, EDF, Fednav, J. Lauritzen, Klaveness,Kline, Marubeni, Mitsui, NYK, Oldendorff, Pacific Basin, Pioneer, Shinwa, and Ultrabulk. Shipbrokers, such as SSY and Clarksons, often play a role in arranging and managing ocean freight.Brokers can play various, and multiple roles, including:

• Securing a charter,

• Obtaining competitive rates from ship owners,

• Assisting in negotiations of contracts, and

• Assisting in management of freight contracts.



Freight Booking OptionsOcean-going ships hauling commodities such as coal are often referred to as “Bulkers.” The sizeof vessel on which coal is transported can be an important component of an export transaction,though that is not always the case, depending on the current market for freight, or hull space.

Bulkers are categorized in several different ways, including size and unloading capability. Withrespect to size, there are four primary categories.

Bulkers are also categorized with respect to their unloading capabilities – generally three types:Self-unloaders, Geared Bulk Carriers and Gearless Bulk Carriers. Self-unloaders are bulkers withconveyor belts or excavators that allow for cargo to be discharged efficiently without cranes, orother shore-based equipment. Geared Bulk Carriers are typically Handysize to Handymax size,with a series of holds. The term “geared” means the vessel is equipped with on-board cranes orother equipment that allows for them to load or discharge cargo in ports without shore-basedequipment. In the same context, “gearless” bulk carriers are bulkers without cranes orconveyors, which require shore-based equipment for loading and unloading.

Category Deadweight Tonnage (DWT) Typical Length Dra�Handysize 10,000 - 35,000Handymax 35,000 - 90,000 150-200 metersPanamax* 60,000 - 80,000 up to 294.13 meters up to 12.04 metersCapesize 80,000 and over* Expansion of the Panama Canal will permit its use by bulkers, or vessels larger than the current Panamax size.

Categories of Bulkers

Strategies


Realizing Illinois Coal Export Potential • Strategies

Summary of Illinois Export StrategyEnhancing Competitiveness of Illinois Coal ExportsThe recent success of Illinois coal in the export markets is attributable in large part to its relativecompetitiveness in the global steam coal market. Therefore, any efficiency improvements in thesupply chain will enhance the attractiveness of Illinois coal.

Three potential cost-cutting areas were identified during this study. They are:

I. Efficiency improvements in the loading of coal either into railcars or barges

II. Reliability improvements to maintaining river flow

III. Capacity improvements to Port of New Orleans, via dredging and other means, to allowfor Capesize vessel loading

Loading EfficiencyNot all Illinois mines are served by rail. Several producers indicated that the addition of rail-loading capability, at some point, would assist efforts to move their coal into the export market.Several producers also indicated that public or public-private investments in improved rail- ortruck-barge loading terminals would improve the competitiveness of Illinois coal. Given thecurrent surplus of ready supply, these types of initiatives are not considered for immediateaction but could be considered in the near-term given the advanced planning required. A list ofIllinois coal producers is provided in Appendix I to this report.

ReliabilityReliability of a supply source is a key determinant in purchasing strategies. Drought conditionsin the Midwest during 2012 highlighted another potential impediment to optimizing the valueof Illinois coal assets through export trade. While commerce on the Ohio River continued largelyunabated during the drought, low water in the middle Mississippi River district (between St.Louis and the confluence of the Ohio and Mississippi), disrupted movement of some coal forseveral months in early 2013. The slowdown in barge traffic highlighted the need for producersto have multiple delivery options -- rail to the Gulf, truck or rail to the Ohio, and possibly anadditional Illinois coal terminal further south on the Mississippi.

As noted above, not all terminals can accept rail coal and considerable export volumes areloaded into vessels through midstreaming. The current “solutions” have been emergencydredging and blasting at key choke points along the Mississippi, as well as limited diversion ofwater from other sources. Given the importance of maintaining navigation on the Mississippi, itis important that the state continues to use its influence to find longer-term solutions even afterthe immediate crisis is resolved.

Port CapacityCreating and sustaining coal trade with Asia, a growth market for steam coal worldwide, isdependent to a large degree on lowering the cost of transport from Gulf ports to harbors acrossthe Pacific Ocean. The key to this enhancement for Illinois coal producers will manifest itself inefforts to dredge, or otherwise provide capability at the Port of New Orleans, in particular, forlarger ocean-going vessels to load. Vessels that now serve Asian markets are known as Capesizevessels, typically carrying about 150,000 tonnes – that reach the Pacific around the tip of SouthAmerica, or potentially the tip of Africa.

Cape vessels, or course, offer the lowest per tonne cost for long hauls, followed by what areexpected to be a generation of Post-Panamax vessels, carrying up to 125,000 tonnes. The


Realizing Illinois Coal Export Potential • Strategies

current depth of water in Gulf ports does not now accommodate the loading of either Capes orPost Panamax vessels. However, dredging would allow Post-Panamax or Capes to call on Gulfports, increasing the potential for Illinois coals to compete in Asia. Preliminary estimates arefreight savings of plus or minus $5 per tonne.

Part of the effort is the Dredging for Restoration and Economic Development for Global ExportsAct of 2012, called the DREDGE Act of 2012, for short. The measure, introduced but not passedin the last session of Congress, has as its goal to operate, and maintain a navigation channel of50 foot depth from Baton Rouge, LA, south to the Gulf. Given the potential economic value ofbeing able to load large vessels, it is important that the State of Illinois and supporters of thestate’s coal trade support this initiative.

Marketing Support for Small ProducersThe marketing of Illinois coal in the export market is dramatically different than marketingIllinois coal domestically. Smaller producers and producers without export experience facechallenges regarding the identification of counter-parties, handling logistics of moving coal tothe typical point of sale, i.e., FOB vessel, and managing the commercial risks.

Two areas of potential support were identified. The first is the development of counter-partyguidelines to assist the smaller producers. Such guidelines would detail the customary andappropriate safeguards for transactions to minimize risk, e.g., the requirement of a letter ofcredit, or some other performance assurance, from the buyer. The second is a list of known andreputable traders of Illinois coal. This list is provided in Appendix II to this report.

Expanding Global Awareness of Illinois CoalGlobal knowledge of the availability and attractiveness of Illinois coal is limited, in part becauseof the variety of coals in the U.S. and their multiple regional sources. Larger Illinois and nationalcoal producers and traders have been very successful in educating customers, to some degree,about the potential of Illinois coal to meet needs throughout the world. However, the state andits coal trade will benefit if more voices, at more key venues, are disseminating information thatis consistent, buyer-friendly and up-to-the-minute in terms of availability and price.

State of Illinois overseas trade representatives, working for the DCEO International Trade Office,can play an important function in this regard. These representatives have access to individualsthat can promote consideration of Illinois coals. This list is provided in Appendix III to this report.

Second, a cohesive, well-thought-out plan for a series of high-level coal trade missions in 2013-15 could be timely in raising the profile of the Illinois coal industry, finding emerging overseasmarkets and assessing enhanced opportunities with installation of new emissions controltechnologies at overseas power plants and access improvements with the expansion of thePanama Canal in 2015. These trade missions, led by the Governor or his designee, should beconducted, whenever possible, in concert with industry market-development meetings inEurope, India, China, or other market growth locations.

While the primary focus of international marketing should remain sales-focused, opportunitiesfor foreign corporate investment in Illinois also may present themselves. This is based on recentinvestments by several international players in non-domestic coal assets. For example, Indiancompanies have invested in coal assets in Australia, Indonesia, Mozambique and the U.S. Theseinvestments are being made in part to hedge their domestic coal supply requirements. TheIndian companies fully intend to import coal from these assets if and when the economics areright. Given the potential competitiveness of Illinois coal, foreign investment in Illinois coal maybe a vehicle through which additional exports are realized.

Appendices



Company Contact Email PhoneCoeclerici Fred Cushmore [email protected]

E.ON David Pineda [email protected]

EDF Trading Chris Savage christopher.savage@ed�rading.com 240-744-8000

Glencore John McConaghy [email protected] 203-328-4900

Goldman, Sachs & Co. Sam Grossman [email protected] 212-902-0770

JP Morgan Aaron Mar nsen aaron.m.mar [email protected] 713-236-5216

Mercuria Energy Trading Ma! Schicke [email protected] 832-209-2327

RWE Trading Harry Papadopolous [email protected]

Trafigura Andy Smolenack [email protected] 203-355-7211 Vitol Jeff Midden

Steve [email protected] [email protected]

713-230-1376 713-230-1160

786-472-3107+491605363467

212 852 4662

KRT Commodi es Greg Rellis greg.rellis@krtcommodi es.com +12035420580

Company Contact Email PhoneAmerican Coal Co. B.J. Cornelius [email protected]

Foresight Energy, LLC Mike Moran [email protected]

Arch Coal Bob Gardiner [email protected] 217-652-2667

Knight Hawk Coal Andrew W. Carter [email protected] 855-611-COAL

Peabody Energy Sco� Mayer [email protected] 812-434-8568

Springfield Coal Co. Jennifer Robertson [email protected] 217-793-7443

VIGO Coal John Harman [email protected] 812-759-8446

White County Coal, LLC Tony Rowser [email protected]

White Oak Resources, LLC Sco� Spears [email protected] 618-643-5500Eagle River Coal, LCC Joe Pearson [email protected]

740-338-3100

859-685-6362

704-502-7472

618-926-0365

Foreign Trade Office Contact Email Phone

Canada Office Jeffrey Johnson [email protected] European Office Maciej Cybulski [email protected] East Office Norman Li [email protected] 011(852) 2544-3863La!n America & Caribbean Raymundo Flores director@illinoisla!namerica.org 011–52-55-5533-6666Middle East Office Sherwin Pomerantz Sherwin@a!d-edi.com 011 (972) 2-571-0199North Asia Office Motoshi Yamada [email protected] 011(81) 3-5561-6005China Office Zachary Zhao [email protected] 011(86) 21-6279-7640West European Office Sharon Stead [email protected] Asia Office Jyo!rmoy Bha"acharjee [email protected] 011-91-11-40508782

416-695-9888011(48) 22-827-5961

011(32) 2-646-5730

Africa Office Melanie Roberts [email protected] 011(27) 12-993-0159Brazil Office Claudia Tomaselli ctomaselli@tvzinterna!onal.com.br 011(55) 11-3010-8489

Appendix III. Traders Active in Illinois Basin

Appendix I. Illinois Coal Producers

Appendix II. DCEO International Trade Offices

Glossary



GlossaryBituminous Coal – coals are classified by rank based upon quality. Bituminous coals typicallyhave a heat content on a moisture and ash-free basis of 10,500 to 14,000 Btu per pound.

Btu or British thermal unit – the amount of enery needed to heat one pound of water by onedegree Fahrenheit. The Btu content of coal is a measure of its heat content.

Counter-party credit risk - the risk to each party of a contract that the counterparty will notlive up to its contractual obligations. Also known as default risk.

CIF – a term of sale indicating that the cost of goods, marine insurance and oceantransportation (freight) charges are paid to the point of delivery by the seller.

DWT – Deadweight tonnage; a measure of how much weight a ship can safely carry. It is thesum of the weights of cargo, fuel, fresh water, ballast water, provisions, passengers, and crew.

FOB – Free on Board – a term of sale indicating that the cost of the delivery of goods is theseller’s responsibility only up to the port of loading. The ocean freight and marine insurance ispaid for by the buyer of the goods.

FOB barge - all costs are borne by the seller until the coal is loaded into a barge

FOB mine - all costs are borne by the seller until the coal is loaded into a railcar

FOBT – Free on Board Trimmed – as for FOB, but including trimming (leveling off) cargo afterloading; ownership passes after the coal is loaded into the ocean vessel

Heat value or calorific value - the amount of potential energy in coal that can be convertedinto heating ability; typically measured in Btu per pound or kilocalories per kilogram; coal ranksfrom highest heat value to lowest heat value are anthracite, bituminous, subbituminous, lignite

Illinois Basin – the coal producing areas in Illinois, Indiana and Western Kentucky.

Liquidity - an asset's ability to be sold without causing a significant movement in the price andwith minimum loss of value

Midstream loading (or midstreaming) - an ocean-going vessel sails up a river, is tied topermanent buoys in the river and cargo is transferred using barge-mounted cranes stationedbeside the vessel so its bucket can reach several ship holds.

Panamax Vessel –the maximum size vessel that can transit the Panama Canal typically 60-80,000 DWT

Powder River Basin –a large deposit of sub-bituminous coal lying in northern Wyoming andsoutheast Montana. The active mining areas include the eastern outcrop of the Wyodak coalbed near Gillette, Wyoming, the higher-Btu Anderson-Deitz coal seams found in the area fromSheridan, Wyoming through Decker, Montana, and the thick Rosebud-McKay seams minednear Colstrip Montana.

SCoTA – standard coal trading agreement; a contract of choice through which for the trade ofseaborne thermal coal

Steam coal - coal burned, primarily in boilers, to generate steam for the production ofelectricity or for process heating purposes, or used as a direct source of process heat; alsoknown as thermal coal

Stevedore - company engaged in providing loading/ discharging services for vessels.

Subbituminous coal – coal which is of a lower rank than bituminous. The heat content ofsubbituminous coal is 8,300 and 10,500 Btu per pound on a moisture and ash free basis.

Ton or short ton – 2000 pounds; U.S. coal is measured in tons.

Tonne – a metric unit equivalent to 2,204.6 pounds. International coal is measured in tonnes.

Printed by the Authority of the State of Illinois. 100 4/13 W.O. 13-058 IOCI 13-0554

Documents

Realizing Illinois Coal Export Potential