U.S. Revenue Up Coal Exports As Domestic Demand Dwindles

Date : 02/06/2012 @ 9:29AM
Source : Dow Jones News

U.S. Revenue Up Coal Exports As Domestic Demand Dwindles

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Coal may be a dirty word in the U.S., but Asia's growing appetite for the fuel has triggered a boom in export-facility investments on American shores, just as domestic demand for coal is stagnating.

The U.S. Energy Information Administration estimates 2011 exports surpassed 100 million short tons for the first time since 1992, and some market watchers expect exports to top that this year.

"I think the U.S. can do quite a bit more as far as being a swing supplier" to the global coal market, said Michael Tian, an equity analyst with Morningstar.

Higher sales prices in Asia and Europe have made sending coal to those markets more attractive, while U.S. emissions regulations and competition from cheap natural gas limit domestic demand.

Fast-growing China and India have been sucking up shipments to fuel an expansion of coal-fired power plants, disrupting traditional supply channels. South Africa -- a traditional exporter to Europe -- has been sending more shipments to Asia, creating a hole in the market that the U.S. has helped fill.

U.S. coal producers looking to gain direct exposure to the Asian market have ramped up efforts to bring a major coal-export terminal to the U.S. West Coast, where currently none exists. Though they have run into protest from environmentalist groups, who say increased exports would undermine efforts to phase out coal use in the U.S., the companies remain confident they can complete the projects.

Peabody Energy Corp. (BTU), the largest U.S. coal producer by output, estimates it exported 6 million tons of its total 2011 production of 203 million tons.

Vic Svec, a spokesman for the St. Louis company, said Peabody's exports from the U.S. nearly doubled in 2011. "And we expect that number to increase" in 2012, he said.

Historically, U.S. exports were limited to Appalachian steel-making coal going to Europe. But Svec said demand has risen for power-plant coal from the Midwest, Colorado and the Powder River Basin in Wyoming and Montana.

For now, Australia and Indonesia have been able to tap into Asia's demand for such thermal coal, and analysts say competition should increase from other countries such as Mozambique, Russia and Mongolia.

Peabody hopes to push into the Asian market with the Gateway Pacific Terminal in Bellingham, Wash. There, privately held terminal operator SSA Marine, a unit of Carrix Inc., plans to build a port in about four years that would be capable of handling as much as 53 million tons of coal annually.

A few hours' drive down Washington's coast, Arch Coal Inc. (ACI) and Australia's Ambre Energy Ltd. are working to turn the site of a former Alcoa Inc. (AA) aluminum smelter in Longview, Wash., into a coal terminal capable of initially handling 5.5 million tons a year.

"There's enough players out there that everybody's trying to get a piece of the pie," EIA analyst Diane Kearney said. "But (100 million tons) is still a pretty impressive number if the U.S. can maintain it."

The EIA estimates exports in 2011 totaled 107 million tons and will rise to 134 million tons by 2035 due to increased global demand. Comparatively, total U.S. coal production was 1.08 billion tons in 2010, the last full year of EIA data.

In the past 60 years, annual coal shipments out of the U.S. rose above 100 million tons only six other times, which were spread out across the 1980s and 1990s during short-lived spikes in demand from Japan and Europe.

On the East Coast, Consol Energy Inc. (CNX) is expanding its Baltimore terminal to accommodate 2 million more tons a year, allowing it to ship out 16 million tons annually. The company's exports rose 68% to 11 million tons in 2011 from 2010 levels.

Along the Gulf of Mexico, energy-infrastructure company Kinder Morgan Energy Partners LP (KMP) signed deals to export more coal for Alpha Natural Resources (ANR) and Arch in the last year. Kinder Morgan said on Jan. 24 it would spend $140 million to expand its export terminal in Houston.

Cloud Peak Energy Inc. (CLD), which focuses solely on the Powder River Basin, said its exports grew 47% in the first nine months of 2011 to 3.7 million tons from the same period a year earlier, chiefly out of Canadian terminals.

Tian, the Morningstar analyst, said the West Coast projects will be in big demand when they open, but exports could eventually hit a ceiling, as transportation costs will make U.S.-produced coal less competitively priced than coal produced closer to major Asian customers.

He said U.S. coal suppliers could eventually decide to expand by buying international mines, as Peabody has done in Australia. Still, he said steps by many U.S. coal companies to expand internationally have seemed cautious so far.

"Down the road, I wouldn't be surprised at all if other companies decide to acquire mines outside the United States," he said.

-By Ben Fox Rubin and Matt Day, Dow Jones Newswires; 212-416-3108; ben.rubin@dowjones.com

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