current spot market prices of coal
produced in the major domestic coal
markets, is significantly higher than
even the highest priced coal
(Central Appalachian) on a per million
Btu basis.
In addition, it is important to note
that natural gas has historically been
much more volatile in price, trading in
a much broader range of prices
(US$1.09 – US$15/million Btu in just
the past couple of years). Coal,
meanwhile, has historically traded at
US$2 – US$3.50/million Btu.
At current prices, much of the
domestic US gas production is
uneconomic. While the breakeven price
of gas production is coming down, for
most reserves it remains at
US$4 – US$5/million Btu, which would
mean a switch to natural gas by utilities,
at current low prices, essentially locks in
an inflation factor of a nearly 100%.
As noted, natural gas is
unsustainably cheap at its current price
level. If it becomes the dominant fuel in
electric generation, prices will
necessarily rise past the breakeven point
in order to recoup already sunk costs,
leading to a high level of built in price
inflation for electric generation. Some
studies have pointed to as much as a
50% – 75% increase in end-user electric
bills. It is doubtful that the price would
go that high in the foreseeable future,
but an increase of 35% – 40% is highly
likely. This would lead to severe
hardship for people on fixed incomes,
the elderly, poor and even the middle
class, absent of some type of government
subsidy to reduce costs.
Another problemwith natural gas is
that it has limited storage potential
onsite, which essentially restricts the
ability of the utility to ramp up electric
production to meet demand. In essence,
the power plant’s capacity is limited by
the size of the pipe and the amount of
gas readily available on the market at
that particular time.
Still another problem for natural gas
is its own environmental footprint. The
same forces that are attacking coal have
begun attacking natural gas and oil
production. They are portraying
fracking, horizontal drilling and even
pipeline construction and rail transport
of natural gas as environmentally
damaging and potentially hazardous,
pointing to pipeline explosions, the
release of methane during the drilling
procedure and the injection into the
ground of fracking fluid. In essence, the
war on coal has become a war on all
fossil fuel use. Consequently, utilities are
hesitant to invest in a long-term build
out of natural gas capacity. In fact, most
of the switch from coal to natural
gas-fired generation has been done
through expanded use of inefficient
small ‘peaker’ plants rather than
construction of the new and efficient
natural gas combined cycle plants.
Worldwide decline in
demand for metallurgical
coal
West Virginia’s metallurgical coal is
recognised worldwide for its quality.
The state’s metallurgical coal production
has historically accounted for about 40%
of its annual production of coal –
between 50 and 60 million tpy.
Metallurgical coal also accounted for a
large percentage of the state’s coal
exports.
Recently, given the worldwide
economic slowdown, demand for
metallurgical coal has been slipping. For
several years, it was buoyed by demand
from the fast-growing Chinese and
Indian economies (which were surging
to meet internal demand), but as the
Chinese economy has slowed,
West Virginia’s sales of metallurgical
coal have followed, declining fairly
quickly over just the past 2 yr.
While the decline in demand for
metallurgical coal is exacerbating an
already difficult coal market for
West Virginia, it is important to note that
there is a major difference between the
slackening of demand for metallurgical
coal and the decline in the market for
thermal coal. The difference is that the
slackening of demand for metallurgical
coal is part of a normal market cycle,
whereas the decline in the market for
thermal coal is structural, based on
policy decisions by the federal
government.
West Virginia will mine and market
metallurgical coal successfully for many
years to come, so the 50 – 60 million tpy
metallurgical production in the absolute
floor of West Virginia coal production.
Declines in exports of
thermal coal
Coal plays an important role in the
global energy mix, representing 29% of
total primary energy demand in 2012,
according to the International Energy
Agency’s (IEA)
World Energy Outlook
2014
.
While this percentage is expected to
decline to 24% in 2040, the IEAprojects
global coal demand on a tonnage basis
will increase 15% by 2040.
“The fortunes of coal, however, differ
dramatically by region. Coal demand
declines in all OECD regions, particularly
in the US where a sharp reduction in
coal-fired electricity generation falls by
nearly one third in the IEA’s forecast,
owing to increased regulation and
competition from other fuels, especially
unconventional gas and renewables.
Coal demand in developing countries,
on the other hand, is expected to increase
by one third by 2040, with significant
growth in Southeast Asia, India, Africa
and Brazil (China’s coal demand is
expected to peak in 2030),” the IEAnotes.
Competition from other
coal producing regions
Taking a second look at Table 1, in
addition to the relative cost of natural
gas, it also clearly shows the relative
cost structure of coal from the various
domestic producing regions. The chart
reveals what is perhaps the greatest
single long‑term threat to the
West Virginia coal industry: its high
cost relative to coal produced in other
regions across the country. This is
especially true of Central Appalachian
coal (southern West Virginia lies in the
Central Appalachian region whereas
northern West Virginia is the in
Northern Appalachian region).
Coal produced in the Illinois Basin
– including Illinois, Indiana and western
Kentucky fields – is close enough in
terms of quality of burn (Btu) and in
terms of proximity to the primary power
generation market area of West Virginia
coal to displace West Virginia coal in the
market. Its current price structure
relative to Appalachian coal (both
Northern and Central Appalachian) has
led to an erosion of traditional markets
for Appalachian coal in terms of thermal
generation.
16
|
World Coal
|
July 2015
