coal & energy 121911

COAL & ENERGYPrice Report Volume 13, No. 242 December 19, 2011

No duplicatioN of this report iN whole or part is permitted without express writteN coNseNt of eNergy publishiNg, iNc.

Market Commentaryby Jim Thompson

see market commeNtary, page 2 see petcoke, page 3

It looks more and more like Alliance Coal is poised to acquire Chester Thomas’ Advent Mining, which operates the Onton underground mine in Western Kentucky. Onton leases have begun to be intermingled with leases held by Alliance’s Dotiki and Cardinal mines, sources said. Alliance and others have had Advent on the radar for some time. The reason for their interest is pretty clear. Thomas has a long history as a Western Kentucky coal operator and knows what he’s doing. Thomas “successfully took over Chevron’s P&M Sebree mine, renamed it Vision 9, and was able to produce about 1.2 million tons/year of Springfield seam coal for a number of years,” John Hanou noted in his recent Illinois Basin study for Hanou Energy. “The mine closed permanently in 2007.” That led to the development and opening of Onton on a 50 million-ton reserve in the Springfield seam. The room and pillar mine, which is located in Webster and Hopkins counties, has consistently produced around 2 million tons/year since it opened in 2005, Hanou noted. “Production is washed and conveyed to Thomas’ Onton dock on the Green River at Mile Point 49.” The reserves at Onton are held in a 2007 $42 million sale-leaseback arrangement with Penn Virginia Resources, according to Hanou. Total reserves covered consisted of 51 million tons over 17,000 acres. The transaction also included the mine’s preparation plant and coal

Petcoke offers IB coal exports competition, but its reach shouldn’t be overratedBy Paul [email protected] When an official with a European utility recently told Coal & Energy’s sister publication, Inside Coal, that power producers are suddenly entering the petroleum coke market in a pretty big way, it was an attention grabber. It wasn’t particularly surprising that utilities were once again considering petcoke consumption. After all, pricing for the fuel had been very high for a long period, and now it has dropped about 50 percent in only a few months. The current price for high-sulfur petcoke produced in the Gulf Coast region is $47-56/metric tonne FOBT. As recently as August, the price was in the mid-to-high $80s range. Some believe the numbers have room to decline a little further, as several million additional tons make their way to the marketplace with new cokers coming online. Increasingly, we hear talk of European utilities expressing interest in fairly sizeable volumes of petcoke for next year, and some of the tonnage might displace Illinois Basin coal currently being used by some consumers. The source told Inside Coal that in Europe, it’s now “all about petcoke,” and Illinois Basin suppliers should be worried. Not everyone agrees with that assessment, believing the statement to be greatly exaggerated. Petcoke production totals a mere fraction of coal output across the globe, and switching is never an overnight process. While acknowledging that a certain amount of U.S. coal going to Europe could be displaced by petcoke, a Coal & Energy source said the potential for switching is minimal.

In other words, there is no need to panic, Illinois Basin guys. There is a finite amount of petcoke available, and many utilities can consume only small amounts. “When you are talking about petcoke, it’s not like there are 500 million tons out there,” the source said. “There will be a cargo here and there, sure. It could be a couple hundred thousand tons for some people, but it’s not tens of millions of tons. “Everyone can’t use petcoke. They can’t flip a switch and say ‘we will start burning petcoke and not burn any coal. It’s a slow process. I don’t see a huge amount of switching happening.” Even if some volumes of Illinois Basin coal are replaced by petcoke, there remain plenty of buyers for the coal, which continues to attract the overseas consumers due to price. “A few cargos of Illinois Basin coal might get displaced, but somebody else will buy it,” the source said. “India wants coal. They are trying out Illinois Basin coal. They can handle the sulfur. “India is building power plants. Their appetite for coal in the next 10 years is huge. The delta between the coal they need and what they produce in the country is going to be in excess of 250 million tonnes.” All told, the source estimates European utilities, if they came into the petcoke market full force, could consume 5 million tons annually. UK’s Drax, a big coal consumer, is capable of burning 1 million tons, the source said. Some German power producers such as RWE could burn more petcoke if the price is acceptable. Other utilities in Europe could also increase their use of petcoke.


Market Commentary

COAL & ENERGY PRICE REPORT December 19, 2011

see commeNtary, page 3

coNtiNued from page 1

handling facility. At the end 2010 remaining reserves were about 45 million tons.Met pushback ‘doesn’t feel good’ It’s bad news for metallurgical coal suppliers, maybe worse news for folks who sell into the domestic utility market. Export demand for coking coal has slowed enough that consumers are beginning to tweak delivery schedules in a more meaningful way. “We’re starting to see more and more pushback,” a source with one major exporting company conceded.Prices continue on a downward trend. “The Europeans don’t know what to do. They’re on the fence, not wanting to commit to schedules. To the extent there are schedules, they’re pushing them back a little where they have the chance. “It doesn’t feel good.” Keep in mind, now, that “slow down” doesn’t mean “stop.” Export terminals are staying busy. One supplier said “We’ve got a pretty good first quarter lined up, actually.” But there’s ol’ B.B. King up on the stage, tuning Lucille and getting ready to sing “The thrill in gone/the thrill is gone away/the thrill is gone, baby/the thrill is gone away/you know you done me wrong, baby.” Fortunately B.B. isn’t the Fat Lady, and she hasn’t sung. A measure of the coking coal consumer pushback is on uncertainty and fear more than on current reality. “It’s the classic response you get from the buyers – the lack of visibility,” a source said. “They just don’t know what they have.” In Europe, steelmakers are producing at a level that is “some discount to full capacity,” the source noted, but is there some stability at that level, “or is (steel) going to turn down further? They don’t know.” But in response to the unmapped environment, “everyone’s pulling their inventories back.”

The dynamic also is being fueled by austerity measures on the part of the European steelmakers. “I sense that the credit crunch going through Europe is causing people to pull their inventories down, too,” a source said. Here is why it is still unclear how negatively coking coal exporters will be affected over the next few months: “Inventories are pretty low already,” a source said. If Europe were, somehow, to find its economic footing – or if for whatever reason steel demand doesn’t erode as much as is feared – demand for coking coal could turn upward reasonably soon. Time will tell. Obviously, the domestic utility market in the East doesn’t need any new injection of coal trying to find homes. Every cargo pushed back signals the potential for more supply to be available to domestic utilities that have shown scant desire for the relatively modest amount of coal now looking for a place to land. The suddenly squishy soft Norfolk Southern utility market is early evidence of the slowdown in met demand. It would be difficult for NS-served power plants to absorb additional supply.MACT the Knife Sometime this morning it’s very likely the EPA will officially unleash MACT the Knife. The regulator was expected to sign the final Utility MACT rule this past Friday. We anticipate most focus around final regulations to revolve around compliance flexibility for units intending to retrofit but requiring time beyond the 2015 deadline mandated under the Clean Air Act,” Julien Dumoulin-Smith, UBS Securities’ director-Equity Research for the Electric Utilities & IPPs Group, wrote. Dumoulin-Smith noted that “the bulk of plants will retrofit and not retire, thus issues around adequate time to design, procure, and build across the industry remain key.” The pipeline is likely to stretch to 2018, he noted. “We look for the rules to suggest a 1-year extension from state authorities (state-level EPAs) as a clear avenue for most. It remains less likely that plants not intending to retrofit will be afforded this same 1-year delay,” he wrote, because the

initial state-level exemption is legally premised on there not being control technology equipment available for installation. Dumoulin-Smith figures the chlorine standard is the most difficult hurdle for utilities to overcome and will be the primary driver to plant retirements. He wrote “it is this element of the rules which requires many coal units to seek scrubbers, particularly in the East, where substantially higher chlorine levels are found. “It can generally be thought that coals containing higher sulfur also contain high chlorine, though this is not always a consistent trend,” the UBS analyst wrote. Many Powder River Basin-burning power plants will find chlorine targets “readily achievable” using dry sorbent injection (DSI), the effectiveness of which has been “extremely high.” DSI controls both chlorine and SO2 emissions, Dumoulin-Smith noted. “As a side note, our recent power plant survey suggested many more power plant managers were pursuing DSI as a retrofit option than currently portrayed by utility executives,” Dumoulin-Smith wrote. “This is consistent with our expectations for low-cost compliance with the (chlorine) component of the rules for many PRB units.” Beyond chlorine, the particulate matter standard is the “second most challenging element of the rules,” in Dumoulin-Smith’s view, because it effectively requires nearly all coal plants in the U.S. to reduce their PM emissions. “The need to install a baghouse spans all coal types, with few exceptions,” the analyst wrote. The industry standard for PM compliance remains a fabric filter baghouse, Dumoulin-Smith noted, but such a choice “is the most expensive technology with costs between $200-250/kW for recent projects.” “Utilities seeking lower capex solutions have found a myriad of other solutions,” Dumoulin-Smith wrote, but they have been “effective on more of a



coNtiNued from page 2

Market Commentary

petcoke, from page 1

case-by-case basis and are not the rule.” Alternatives include expanding existing electrostatic precipitators (ESPs) and the use of refined coal products that involve the chemical of treatment of coal prior to burning. Units with relatively new wet scrubbers and selective catalytic reduction are able to meet the PM standard without spending additional capex, according to UBS. Mercury gets a lot of attention, but utilities will find this the MACT component offering the smallest challenge, Dumoulin-Smith wrote. The mercury standards typically present the least issues for coal plants to comply with,” according to the UBS analyst. “The required reductions can typically be achieved through the industry gold standard, activated carbon injection (ACI). “This involves injecting activated carbon – effectively the same black carbon used in water filtration today – to absorb the mercury from the air. The ACI is then recaptured in the coal unit’s ESP or baghouse. “While injecting ACI can typically achieve the standards and has a modest

variable cost (less than $1/MWh), a certain percentage of ACI typically escapes through the ESP or baghouse driving up the coal plant’s PM emissions – think higher dust. In turn, there is a need for a delicate balance between injecting sufficient ACI to achieve required mercury targets, while keeping PM emissions below stated levels. “It is as a result of this balance that many units will need to upgrade their existing PM control technologies.” Clearly Dumoulin-Smith sees PRB coal faring best under MACT the Knife. Many lignite units are likely to blend more PRB in tandem with DSI to achieve chlorine targets. “Higher rates of reduction for Illinois Basin, Northern Appalachian coal and Central Appalachian coal would require scrubbers,” the analyst wrote. Dumoulin-Smith concluded: “We remind investors the type of coal burned is the primary determinant driving the appropriate retrofit technology. In general, PRB coals require substantially less capex to make them compliant with HAP MACT regulations. “At first glance, investors largely fail to appreciate the large disparities in required retrofits between various coal types.”

“Germany could, depending on additional needs as they phase out nuke plants, increase their petcoke consumption,” the source said. Of course, no one likes competition when they are in the fuel sales business. But the source said coal and petcoke can peacefully coexist in Europe. “The coal people don’t like the petcoke people,” the source said with a chuckle. “That’s a given because it does displace some coal. If you are selling coal, you

don’t want that. But Illinois Basin coal, for the quality on a per-million basis, is a good buy. “Petcoke is also a good buy. They can both compete.”Another competitor still looms large If petcoke is not a major concern for coal suppliers, rest assured natural gas remains a big-time concern as an alternative fuel heading into next year. Some have expressed a belief that gas can do little more damage to coal’s share of the market

than has already been absorbed, but gas prices continue to drop. The latest Henry Hub price at this writing was $3.12/MMBtu. “It’s cheap, cheap, cheap,” the source said. “There’s just so much of it out there. We will see how the winter goes. Domestically, I think you will see many utilities backing down on coal burns and supplementing it with natural gas if they can. I think it is possible that they might use even more gas than this year.”

Petcoke offers IB coal exports competition, but its reach shouldn’t be overrated

UMWA unveils new agreement for 5 prep plants, offers praise for Alpha approach The United Mine Workers of America has reached collective bargaining agreements with Alpha Natural Resources covering five Central Appalachia coal preparation plants that had previously been owned by Massey Energy. Workers at the plants had been working under the provisions of a previous contract that expired in 1998. “This is a very good day for these workers and their families,” UMWA International President Cecil E. Roberts said. “They will get a substantial initial raise, the first they’ve had since 1998. They will get annual wage increases for the life of the agreement. They will get a $1,000 bonus. They will get shift differentials, a clothing allowance, sickness and accident benefits and the best quality health care benefits. “I commend the workers at these plants for persevering so long and sticking with the UMWA in the face of constant attacks by the previous ownership,” Roberts said. “Massey simply refused to take any steps to reach a fair agreement as long as these workers stayed in the UMWA. But the workers stayed united and it ultimately

see umwa, page 4


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PRB8800 Prompt Month PRB8400 Prompt Month

prompt moNth for csx < 1% & Nymex coals

prompt moNth for prb 8800 aNd prb 8400 coals


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NYMEX Prompt Month CSX < 1% Prompt Month

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paid off for them. “I also want to recognize the fresh approach Alpha is taking with respect to recognizing the value of these employees,” Roberts said. “The UMWA is working to build a good relationship with Alpha at these and other operations where we represent the workers. “We appreciate the company’s willingness to recognize and address the long-standing inequities the workers at these preparation plants were dealing with.” The agreement covers some 145 workers at the following locations: the Bandmill preparation plant in Logan County, WV; the Long Fork preparation plant in Pike County, KY; the Goals preparation plant in Raleigh County, WV; the Chesterfield preparation plant operated by Alpha subsidiary Omar Coal in Boone County, WV; and the Power Mountain preparation plant in Nicholas County, WV. The 5-1/2-year agreement goes into effect January 1, 2012, and will continue until June 30, 2017. (PM)

umwa, from page 3

UMWA unveils new agreement for 5 prep plants

Month Codes: Jan-F; Feb-G; Mar-H; Apr-J; May-K; Jun-M; Jul-N; Aug-Q; Sep-U; Oct-V; Nov-X; Dec-Z

OTC NYMEX Coal Hill Daily Index ©(12,000 Btu/lb., 1% sulfur) Quality Hill Price Hill Index Last Trades

Term Vol Price Bid Offer NYMEX Current Quarter, Plus One $67.75 282.88 12/15/11F12 5B $0.00 $66.85 $67.85 NYMEX Current Quarter, Plus Two $68.75 287.06 12/14/11G12 5B $0.00 $66.85 $67.85 NYMEX Next Calendar Year $70.00 292.28 12/16/11Q112 5B $0.00 $66.92 $67.92 PRB 8,800 Current Quarter, Plus One $12.40 278.03 12/14/11Q212 5B $0.00 $67.95 $68.95 PRB 8,800 Current Quarter, Plus Two $12.90 289.24 12/14/11Q312 5B $70.00 $69.50 $70.50 PRB 8,800 Next Calendar Year $12.78 286.55 12/14/11Q412 5B $0.00 $70.95 $71.95 PRB 8,400 Current Quarter, Plus One $11.25 325.14 11/09/11Q113 5B $0.00 $71.95 $72.95 PRB 8,400 Current Quarter, Plus Two $0.00 0.00 04/07/11Q213 5B $0.00 $73.10 $74.10 PRB 8,400 Next Calendar Year $11.25 325.14 11/09/11Q313 5B $0.00 $73.95 $74.95 CSX <1% sulfur Current Quarter, Plus One $66.88 257.23 12/15/11CY12 5B $0.00 $68.83 $69.83 CSX <1% sulfur Current Quarter, Plus Two $70.30 270.38 12/13/11CY13 5B $0.00 $73.43 $74.43 CSX <1% sulfur Next Calendar Year $68.21 262.35 12/15/11

CSX compliance Current Quarter, Plus One $0.00 0.00 03/09/11

OTC PRB 8800 CSX compliance Next Calendar Year $0.00 0.00 10/15/07

(at 0.8 lbs. SO2) NS <1% sulfur Current Quarter, Plus One $75.50 290.38 11/10/11Term Vol Price Bid Offer NS <1% sulfur Next Calendar Year $75.50 290.38 11/10/11F12 1T $0.00 $12.30 $12.70 NS compliance Current Quarter, Plus One $0.00 0.00 12/09/10G12 1T $0.00 $12.10 $12.50 NS compliance Next Calendar Year $0.00 0.00 12/09/10Q112 1T $0.00 $12.23 $12.63Q212 1T $0.00 $12.55 $12.95Q312 1T $0.00 $12.75 $13.15Q412 1T $0.00 $12.90 $13.30Q113 1T $0.00 $13.30 $13.70Q213 1T $0.00 $13.85 $14.25

Q313 1T $0.00 $14.40 $14.80 OTC Broker IndexCY12 1T $0.00 $12.61 $13.01 December 16, 2011

CY13 1T $0.00 $14.10 $14.60 NYMEX CSX 12,500 PRB PRB

look-alike -1% sulfur 8,400 8,800

CSX-BSK < 1% Prompt Month 67.38 0.18 66.50 0.12 10.30 -0.05 12.08 -0.15

Term Vol Price Bid Offer Prompt Quarter 67.57 0.13 66.72 -0.22 10.45 0.01 12.31 -0.08F12 1T $0.00 $66.00 $67.00 Indices compiled courtesy of Argus Media, Inc.G12 1T $0.00 $66.50 $67.50Q112 1T $0.00 $66.33 $67.33Q212 1T $0.00 $67.90 $68.90Q312 1T $0.00 $69.35 $70.35Q412 1T $0.00 $70.85 $71.85

Q113 1T $0.00 $72.15 $73.15 NYMEX FuturesQ213 1T $0.00 $74.10 $75.10 Term Last Open High Open Low Most Recent Prev. Day

Q313 1T $0.00 $75.25 $76.25 Natural Gas (Henry Hub) Settle Total Vol

CY12 1T $0.00 $68.61 $69.61 F12 3.057 3.098 3.05 3.127 7082CY13 1T $0.00 $74.50 $75.50 G12 3.108 3.148 3.103 3.174 2866

Crude Oil

Emissions Markets Prices F12 94.16 94.33 92.54 93.53 13975

NOX OTC Allowances Ton Units G12 94.38 94.54 92.77 93.75 34318BANK $0 X $0Vintage 2011 Bid/Ask $5 X $15Vintage 2012 Bid/Ask $5 X $15SO2 OTC Allowances

Vintage 2009 Bid/Ask $1 X $2

All prices are based exclusively on latest actual trades, and are indexed against market as of 12/28/99, when

NYMEX-spec coal had been traded most recently at $23.95/ton, 8,800 Btu/lb. Powder River Basin coal at

$4.46/ton and 8,400 Btu/lb. PRB coal at $3.46/ ton. The eastern rail index is measured against an arbitrary

price of $26.00/ton. “Hill Index” reflects weighted average of prices recorded on most recent trading day. On

days when no trades occur, published index remains at previous level. “Mid-market” reflects mid-point of

current bid/ask values.

Report intended for information purposes only, prepared based on information from sources believed reliable. Under no circumstances should it be considered an offer to sell or a solicitation to buy any commodity or investment. Opinion expressed is only a statement of our views based on information received. No guarantee of accuracy or completeness is made. Persons relying on this information do so at their sole risk. No liability shall be accepted by Energy Publishing, Inc. or its employees. This report is the property of Energy Publishing, Inc.. No reproduction or further circulation in whole or in part, is permitted without express written permission of Energy Publishing, Inc.. All information is considered proprietary and confidential. All prices are for indicative purposes only.

Delivered daily to your e-mail account at an annual rate of $1890 (add $150 for fax service). For subscription information, contact John Norris at Energy Publishing at 865.584.6294 or by email at [email protected] duplicatioN of this report iN whole or part is permitted without express writteN coNseNt of eNergy publishiNg, iNc.


Price MarkersNAPP 13,000 Btu/lb., 3.4 lbs SO2/MMBtu, $78.00/ton (RAIL)ILB 11,500 Btu/lb., 2.8 lbs. SO2/MMBtu, $60.00/ton

coal & energy 121911

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