Coal Supply and Demand Fundamentals - CMU · 11/25/2002  · • Supply – Supply Regions –...

Coal Supply and Demand Fundamentals

Carnegie Mellon University, Electricity Industry Center

November 25, 2002

Ellen Ewart, Senior Consultant

Platts Research & Consulting/RDI

2

Presentation Outline

• Background: Coal 101• Current state of the industry• Major market drivers for coal

3

Basic Coal Information

• Supply– Supply Regions– Companies– Mines and Mining Methods– Production– Productivity and Employment– Costs– Supply-Side Regulatory Issues

• Demand– Demand and Consumption by

Market Sector– As-Received Quality– Consuming Companies and

Facilities – Current and Future Technologies for

Coal Utilization– Demand-Side Regulatory Issues

• Prices

• Transportation– Type

• Rail• Barge• Truck• Belt/other

– Distance– Cost

• Environmental– Emissions– Allowances– Emission Control Technology

• Forecasts

4

U.S. Coal Supply Regions

SouthernPRB

Raton/Canon City

NorthernPRB

FourCorners

S. Wyoming

CentralRockies

NorthernLignite

GulfLignite

IllinoisBasin

SouthernAppalachia

CentralAppalachia

NorthernAppalachia

Washington

Source: PowerMAP

5

Coal Quality is Highly Variable

Average Coal Quality (As-Received), 2000-02

Source: COALdat

Coal Supply Region Btu/lb. Lb. SO2/MMBtu % AshEastNorthern Appalachia 12,423 3.84 10.88Central Appalachia 12,405 1.48 10.77Southern Appalachia 12,104 1.89 12.86Illinois Basin 11,316 4.37 10.08WestNorthern Powder River Basin 9,068 1.13 6.56Southern Powder River Basin 8,655 0.70 5.09Central Rockies 11,426 0.84 8.73Four Corners 9,971 1.29 15.92Gulf Lignite 6,438 3.35 16.58Northern Lignite 6,532 2.25 9.52

6

U.S. Coal Industry Expansion

Source: U.S. Energy Information Administration

U.S. Coal Production and Generating Capacity Additions, 1954 - 2000

0

2 0 0

4 0 0

6 0 0

8 0 0

1 ,0 0 0

1 ,2 0 0

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

Coa

l Pro

duct

ion

(MM

Ton

s)

-

5 ,0 0 0

1 0 ,0 0 0

1 5 ,0 0 0

2 0 ,0 0 0

2 5 ,0 0 0

3 0 ,0 0 0

Cap

acit

y (M

W)

Ea s te rn To n s W e s te rn To n s N e w C o a l- Fire d C a p a city Ad d e d

7

Rapid Productivity Growth

0

5

10

15

20

25

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Ton

s/E

mpl

oyee

-Hou

r

Eastern U/G Eastern Surface Western U/G Western Surface

Source: U.S. Energy Information Administration

U.S. Coal Mine Productivity, 1984 - 2000

8

Factors Influencing Productivity

• Technological– Underground

• Longwalls• Advancements in continuous miners• Computerization and automation

– Surface• Larger haul trucks• Draglines• Mountaintop mining• Computerization and automation

– Other• On-line analyzers• Improvements in coal handling systems

• Labor– Training– Declining influence of the union

• Regulation

9

CAPP Surface MinesCAPP Surface Mine Production and Productivity, 1995 – 2002 (Est.)

Source: COALdat

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1995 1996 1997 1998 1999 2000 2001 2002

Ton

s (0

00)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Ton

s/E

mpl

oyee

-Hou

r

Tons (000s) Avg Tons/Emp/Hr

10

CAPP Underground MinesCAPP Underground Mine Production and Productivity, 1995 – 2002 (Est.)

Source: COALdat

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

1995 1996 1997 1998 1999 2000 2001 2002

Ton

s (0

00)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Ton

s/E

mpl

oyee

-Hou

r

Tons (000s) Avg Tons/Emp/Hr

11

NAPP Surface MinesNAPP Surface Mine Production and Productivity, 1995 – 2002 (Est.)

Source: COALdat

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1995 1996 1997 1998 1999 2000 2001 2002

Ton

s (0

00)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Ton

s/E

mpl

oyee

-Hou

r

Tons (000s) Avg Tons/Emp/Hr

12

NAPP Underground MinesNAPP Underground Mine Production and Productivity, 1995 – 2002 (Est.)

Source: COALdat

0

20,000

40,000

60,000

80,000

100,000

120,000

1995 1996 1997 1998 1999 2000 2001 2002

Ton

s (0

00)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Ton

s/E

mpl

oyee

-Hou

r

Tons (000s) Avg Tons/Emp/Hr

13

SPRB Surface MinesSPRB Surface Mine Production and Productivity, 1995 – 2002 (Est.)

Source: COALdat

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

1995 1996 1997 1998 1999 2000 2001 2002

Ton

s (0

00)

0

5

10

15

20

25

30

35

40

45

50

Ton

s/E

mpl

oyee

-Hou

r

Tons (000s) Avg Tons/Emp/Hr

14

Trend Toward Fewer, Larger Mines

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1976 1986 1996 2001

Num

ber

of M

ines

0

100

200

300

400

500

600

700

800

Ave

rage

Min

e S

ize

(000

Ton

s)

# Mines Average Mine Size (000 Tons)

Number and Size of U.S. Coal Mines

Source: COALdat

15

Industry Concentration and Consolidation

O THER6 2 %

W ES TERN

EN ERG Y3 %N ERCO

3 %S U N CO AL

2 %

S HELL MIN IN G

CO .

3 %

ARCO CO AL

3 %

EXXO N

3 %

TEXAS U TILITIES

3 %

AMAX

4 %

CO N S O L6 %PEABO D Y

8 %

PEABODY13%

ARCH10%

KENNECOTT10%

CONSOL6%

OTHER39%

VULCAN4%

NACCO2%

MASSEY4%

HORIZON4%

RAG6%

TXU2%

Sources: Keystone Coal Industry Manual, COALdat

Ownership Share of Production, 1988 vs. 2001

1988 (963 Million Tons) 2001 (1,128 Million Tons)

16

Price HistoryProductivity gains have been critical to profitability of coal industry in the face of declining prices.

0

5

10

15

20

25

30

35

40

45

50

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

P

FO

B M

ine

$/T

on

Bituminous Nominal $ Bituminous Real 1996 $

Subbituminous Nominal $ Subbituminous Real 1996 $

Source: U.S. Energy Information Administration

17

Financial State of the Industry

• Declining prices, decreasing margins are taking their toll on the coal industry.

• At least three major producing companies (including one in the top ten), accounting for nearly 60 million annual tons, are currently under Chapter 11 bankruptcy protection.

• Many more are on the brink, and a number of others have already disappeared.

• Poor finances, coupled with increasing regulatory uncertainty, have strangled capital investment in new mines and supporting infrastructure.

18

The Generation Sector is the Largest Coal Consumer…

Distribution of U.S. Coal by Sector, 2001

Source: RDI Coal Market Research Service

Generation85.8%

R&C0.4%

Metallurgical2.4%Export

5.7%Industrial

5.8%

19

…and Coal is the Dominant Fuel for Electric Generation

U.S. Electric Generation by Fuel Type, 2001

Source: COALdat

COAL53%

URAN21%

GAS16%

WATER5%

OIL3%

OTHER2%

20

Coal Distribution to the Generating Sector by Supply Region

21

Transportation of Coal to the Generation Sector

Railroad70%

Truck16%

Belt8%

Barge5%

Other/Unknown1%

Origin Type, 2001

Raiload62%

Barge18%

Truck11%

Belt8%

Other/Unknown1%

Destination Type, 2001

Source: COALdat

22

Average Capacity Utilization at Coal-Fired Power Plants, 1997 - 2000

23

Average Age of Coal-Fired Power Plants

24

Will New Coal-Fired Generation Play a Role?

• Current economics and regulatory framework have not favored coal for new generation in most regions.

• Projects that go forward generally will have the advantages of:– Extremely low-cost fuel (mine-mouth, waste coal, pet coke)– Favorable political climate (including state-level tax incentives,

financial assistance, “fast-track” permitting, etc.)– No transmission constraints– Environmental compatibility (PSD, Class I areas)

• All new plants will be equipped with state-of-the art pollution control technology.

• Over longer term, new clean coal technologies will be emphasized.

• Projects must “time the market” correctly.

25

The Economics of Coal vs. Gas for New Generation

$0.50 $0.75 $1.00 $1.25 $1.50 $1.75 $2.00 $2.25

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

NOTE: DIFFERENTIAL BASED ON FULLY LOADED COSTS OF A NEW UNIT

COAL PRICE

GAS PRICE

GAS MORE ECONOMIC

COAL MORE ECONOMIC

RDI’S GAS PRICE FORECAST

$0.50 $0.75 $1.00 $1.25 $1.50 $1.75 $2.00 $2.25

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

NOTE: DIFFERENTIAL BASED ON FULLY LOADED COSTS OF A NEW UNIT

COAL PRICE

GAS PRICE

GAS MORE ECONOMIC

COAL MORE ECONOMIC

RDI’S GAS PRICE FORECAST

Fuel Prices in $/mmBtu

26

RDI’s Gas Price Forecast

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

01 Q

1

01 Q

2

01 Q

3

01 Q

4

02 Q

1

02 Q

2

02 Q

3

02 Q

4

03 Q

1

03 Q

2

03 Q

3

03 Q

4

2003

2004

2005

2006

2007

2008

2009

Rea

l 200

2$/m

mB

tu

Henry Hub NYC Hub

Natural Gas Price Forecast (Real 2002$)

Source: RDI Power Outlook, Q3 2002

Delivered prices into the northeast are slightly higher than Henry Hub but reflect generally the same longer term trend

• In the near-term, high levels of storage will put downward pressure on gas prices through Q302.

• Longer term, supplies should tighten.

• Key assumption is that greenfield LNG development will provide incremental supply.

27

Proposed New Coal-Fired Plants

28

Major Market Drivers

• Supply– Reserve depletion– Regulation

• Hayden ruling• Subsidence issues• Trucking restrictions

– Availability of skilled labor

– Financial condition of coal producers

• Demand– Pace of economic

recovery– Inter-fuel competition

• Gas prices• Capacity glut

– Regulation• Environmental• Electric industry

restructuring