Lower Demand Brings a "Rebalancing" to the Coal Market

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Researched by Industrial Info Resources (Sugar Land, Texas)--At the recent Barclays Capital 2009 CEO Energy/Power Conference in New York, New York, Steve Leer, Chairman and CEO of Arch Coal Incorporated (NYSE:ACI) (St. Louis, Missouri) stated that 2009 would bring an unprecedented decline of coal consumption in the U.S. This reduced demand has been caused by a number of factors, including mild weather this year and market share being taken by natural gas. Leer said that he believed about 25 million tons of coal had been displaced by natural gas.

A rebalancing of the market, bringing production more in line with demand, seems to be occurring. Arch Coal estimates that total U.S. coal production this year will be down about 100 million tons from 2008. "We've seen a tremendous decline in overall production, and this is accelerating," said Leer. The central Appalachia region seems to be particularly responsive to this decline in demand. In 2008, the region produced about 235 million tons of coal, but Arch estimates that by the end of this year, run rates will have to dipped to about 180 million tons per year for the region.

While power demand is expected to show a 4% decline in 2009, coal consumption was down 10% for the first six months of the year. This trend could quickly reverse, however, as several new coal-fired power plants are currently under construction. Arch estimates that approximately 16 gigawatts (GW) of new plants will go into operation by the end of 2012, with 10 GW scheduled to go online next year. The Powder River Basin, where Arch holds more than 1.6 billion tons of reserves, is expect to supply half of this new demand, which is estimated to be about 55 million tons annually.

Other uses for coal, such as coal liquefaction, could also have an effect on U.S. coal consumption. Industrial Info is currently tracking more than $160 million of active projects of Arch Coal, including the $80 million expansion of the company's Elk Mountain and Saddleback Hills coal mines in Wyoming, which will be expanded to a 3.2 million-ton-per-year longwall coal mine. The project is being performed specifically to support DKRW Energy LLC's (Houston, Texas) grassroot coal liquefaction plant in Medicine Bow, Wyoming. The plant, which has an estimated total investment value of $650 million, will initially produce about 21,000 barrels per day of diesel, naphtha and iso-butane, as well as 300 million square feet per day of syngas. The facility received all state permits in April. Construction of both projects is planned to kick off summer 2010. While the mine expansion should be complete by late 2011, the coal liquefaction facility will not be completed until early 2014. The success of coal liquefaction projects such as this could introduce an entirely new market demand for coal. Information on these and other Metals & Minerals and Alternative Fuels projects can be found in Industrial Info's North American Industrial Database.

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