Coal values

Trains Magazine General Discussion
1

The April 2010 Trains Magazine, which I just got in the mail (nanner! nanner!, if you haven’t received yours yet) has articles concentrating on coal hauling. A chart shows a comparison of coal values. The heading is The Economics of Coal. As I read it, the value of coal for use in powerplants is dependant on BTU’s and sulfur content.

The chart shows that Powder River Basin coal, from eastern Wyoming, has a thermal value (BTU) of 8,800, and sulfur content of .8 (%?). Uinta Basin coal, from Utah has has a thermal value (BTU) of 11,700, and sulfur content of .8 (%?). The spot market price per short ton, is shown as $9.25/ton for PRB coal, $39.00/ton for Uinta coal. A footnote says the spot market price does not include transportation to consumption point.

What I don’t understand is, the sulfer content seems to be equal. If the Uinta coal has about 50% higher BTU values, why isn’t it worth only about 50% more than PRB coal? Instead, it’s value is more than 4 times that of PRB coal.

ps. How do you pronounce Uinta? Is that an indian name?

2

Presumably the buyer doesn’t care what the cost is at the mine? Maybe the total cost (including transport to the buyer) is just 50% higher for the Utah coal.

3

As Timz pointed out, if transportation costs are the dominant cost of the coal as delivered, then the spread between prices at the mine may be much greater than the BTU content. For example, if transport costs are $30/ton, you would save the equivalent of going with Uinta coal on transport costs alone.

  • Erik
4

Interesting question. I suspect the answer has more than one or two elements. No doubt a coal buyer looks at the delivered cost per BTU as a starting point for his purchase decision, but may have to consider cost factors related to the use of a particular coal. I think I picked up from previous threads here that PRB coal can be more costly to use because of high ash content and low ash fusion. Appearantly may lead to higher boiler maintenance and costs for the collection and disposal the ash.

The cost of mining also has to be a relavant factor. PRB coal is extremely cheap to mine, requires no cleaning in an expensive coal preparation plant and with such high levels of production can obtain very low unit costs for loading operations. As a result they can sell coal at a profit even with high transportation costs to get coal to their customers.

Unita basin coal producers probably don’t even think of trying to sell generally eastward where the Powder River has a clear price advantage as they would have to face the same or greater rail costs than available for PRB coal. However, for markets close to or west of their mines, they might win business just because a lower transportation cost factor allows them to beat the delivered cost of PRB coal.

Just a further thought, keep in mind that the spot market price is essential the result of the “auctioning” of coal left over after coal sales contracts of some term are fulfilled. I am sure that there are some industry stats on the percentage of coal sold on contract vs spot prices, but I don’t know where to find them with out more research. Suppose that most Uinta basin coal production is tied up in contracts. Those producers may not be want to increase supply unless the willing buyer pays a price that gets them a good profit above their fully allocated cost of producing the coal. Somewhat in that same

5

Oh, I cant wait for the March issue to arrive. We have had very interesting discussions on coal here in the past and this should be quite a reference. I pulled out a 2002 issue of trains (May perhaps) which had a map of eastern power plants and the coal they consumed.

Also, as previously mentioned, BNSF’s investor relations dept ( perhaps gone by now) has a dandy map simply entitled “Coal Map”. It lists the power plants in the US, mines, and certain railroad lines. Here in NW Indiana it is fascinating because we have both eastbound coal (PRB) and westbound coal (Appalachian) moving. The PRB coal moves as far east as NY (Dunkirk), while the WB moves primarily, it seems to the massive industrial complex known as “da mills” here in Burns Harbor - East Chicago corridor.

I look forward to understanding why those movements occur. Obviously the BTU content of the coal is critical, as is the sulpher.

Ed

6

Wouldn’t that mean that the PRB coal could bring a higher price? Or at least at a higher margin, and still be competitive?

I’ll have to go back and read some more, about where the Uinata coal goes. I thought I saw where some of it went to Texas? If so, it has to be hauled over the Rockies, just to compete with PRB coal.

7

Got my magazine yesterday, haven’t read it cover to cover yet though.

On the price of coal, though - based strictly on BTU’s, Uintah coal should only cost twice as much as PRB coal. But that assumes that the relative availability and increased BTU’s are linear.

We’ve already discussed the relative availability. Someone with some knowledge of coal will have to tell us if the relationship reference BTU’s is linear or has a non-linear or accellerated relationship (ie, inverse squared, etc).

Inasmuch as many coal-fired plants are often built fairly specifically for a certain type of coal, it could also be that Uintah coal has value for special applications such as metallurgical.

8

After some more thought…

The spot coal market may represent a fairly good example of a free market at work. There are multiple producers and buyers operating relatively free from any factors outside supply and demand. It works as long as you consider transportation cost as an internal part of the market.

Remember past comments about how the set up of the buyer’s boilers can limit the range of coals that can be used. A power plant set up to burn higher BTU coal with lower ash may not be able to use PRB coal. It seems to me that that might actually result in a general segmenting of the spot coal market-one for PRB coal and another for coal from other sources. Perhaps it is even more segmented and more or less functions separately for each of the general producing areas.

Bottom line is that for some buyers, no matter how cheap, PRB coal can’t be used and won’t be bought at any price. If a plant is set up to use Uinta coal, the spot buyer may have little or no choice but to bid in competition with other buyers looking to purchase Uinta coal.

By the way, while the little chart on spot prices i

9

With coal being a commodity, the price is going to depend on a number of factors, including the amount of output, transportation costs, and other costs (such as regulatory, environmental, etc) when compared to other forms of energy such as natgas, oil, nuclear, and other coal.

Not sure if the cost of production determines the selling price, but it would determine whether or not the coal is mined or not. There is an interesting article today in WSJ on North Dakota oil. Considerable oil reserves are located at the Bakken Shale Deposit, at a depth of 10,000 feet. New technologies and drilling methods are now allowing that oil to be tapped. Those production costs determine whether or not the oil flows or stays in reserve. It seems it would be the same with coal.

Interesting comment by CEO Rose of BNSF that PRB coal will be in play for quite sometime, there is demand from China for it. With the low BTU rating, and the massive cost for transportation, how can that be? Is there a shortage of coal, or is China going to address the sulpher emissions issue?

Ed

10

The important measure of sulfur in coal is not % sulfur by weight, but SO2 / million BTU’s since that measures what actually goes up the stack per million BTU’s produced. By that measure, the Unita coal is about 27% lower in sulfur plus the higher BTU content per ton.

The buyer mainly cares what the coal costs at the delivery point per million BTU’s with the added kick of sulfur and other impurities. In the case of PRB coal, transportation to the Midwest adds another $10.00 / ton or more for the coal. For Unita it is probably about $15.00 per ton.

Now, look at the delivered cost per million BTU and I get these numbers,

PRB, $1.11 / million BTU

Unita, $2.30 / million BTU

Clearly, all else being equal, PRB coal is far more cost effective in the midwest.

Reverse this to a power plant in, say, Nevada.

The shipping cost is now about $5.00 / ton for Unita and $15.00 for PRB.

Now the cost per million BTU is:

PRB $1.39 / million BTU

Unita $1.88 / million BTU

The closer to the Unita mine you get, the better it looks. Throw in the advantage of lower sulfur per million BTU, which has associated lower operating and capital costs, and Unita looks much better.

Now, east of the Mississippi PRB coal also competes with local coal. The PRB coal transportation cost increases more and the local coal is less on a cost per million BTU basis. The main driver here is the sulfur in the eastern coal. There’s lots of high BTU coal in southern Illinois but it takes a government edict to install scrubbers in power plants and use this coal because PRB is still less expensive.

To get around this somewhat, Detroit Edison can burn PRB coal since Michigan h

11

Redore:

That was an amazing description of coal economics.

One thing that has always intrigued me is the use of rail/water for coal deliveries. How much is typically saved by using this method vs all rail?

Is the savings, due to the efficiencies of water or the efficiencies of competition? Railroads are very protective of their margins on coal and rightfully so. What level of margins do they attempt to attain with coal traffic?

Ed

12

My ‘take’ on this - which I assure you, is entirely speculative and devoid of any real-world experience in this subject, and not at all negating the many valid points mentioned by others above - is that the competition between PRB producers has driven their spot price below the level that a pure mathematical correlation based on the BTUs per ton of each type of coal would indicate.

To wit - on a BTU per ton basis, the PRB coal should be priced at about $26 per ton - that way, the Uinta coal, which has 50

13

I don’t know the railroad’s actual margin hauling coal. You might find this information in UP’s or BNSF’s (they should still have one for 2009) annual reports. It’s probably actually pretty low as freight goes, but is also probably very predictable.

Each power company negotiates their rates with the railroad independently and some have options between two haulers.

Duluth to Detroit published rates on the Great Lakes are about $9.00 / ton. Large contracts like coal and iron ore are now also negotiated directly and presumably lower than this. Presumably direct rail would be more than this or that’s how it would go.

Remember that to get from the PRB to, say, lower Michigan two or more railroads are involved and the complexity and price of the move goes up considerably.

The power companies have whole departments that lay awake nights trying to figure out how to get the coal cheaper.

14

Phonically,

U-IN- TA

The Uintah Basin is the location of the Uintah and Ouray Indian Reservation, home to the Ute Tribe of the Uinta and Ouray Agency (also known as the Northern Ute Tribe). The Ute Tribe is the source of Utah’s state name.

15

UINTA trains too? [:P]

16

From the same article: " On the Western Class 1 railroads, every ton-mile of coal generates only about 35 percent as much revenue as non-coal traffic."

Do they mean revenue as being money paid by the shipper for transportation? If so, that doesn’t really give a comparison to how coal compares to other traffic, as far as putting profits to the bottom line.

17

I have not read the article, so cannot comment too much. However, on a ton - mile basis coal is going to be considerably lower than other higher rated freight such as chemicals, lumber, and other “loose car” freight.

First, most coal moves in unit train operation. The revenue/carload for unit trains are usually considerably lower than carload freight. Second, a carload of coal generates considerably more ton/miles than most other types of traffic. Third, there is greater liability issues with handling hazardous material commodities, which usually translates into much higher freight rates.

Compare a carload of coal to a carload of intermodal. Perhaps 140 tons for coal vs maybe 50 - 60 tons for intermodal. Less for automotive. Therefore if a carload of coal and intermodal both generate $1000 revenue, then the revenue per ton (not ton mile) would be $7.14 for coal vs $16 for intermodal.

Revenue per ton miles is the industry standard, but personally I think revenue per carload gives a little more information. The tonnage of a train can vary greatly based on the lading. Again, think coal vs autoparts.

Just my thoughts on this. I hope the railroad marketing folks on this forum jump in to tell the real story.

Ed

18

Lets see if I can try to clear things up.

There are 2 main types of coal - steam and met coal. Met coal had a higher BTU content due to the higher carbon content.

As another commenter stated, plants are designed and built to burn a specific coal. There can be small variances in the different values; BTU, ash content, sulfur content, moisture, trace minerals; that do give plants a chance to bid one mine against another. So a plant built for PRB coal cannot burn Unitah coal without a huge rebuild. So each type of coal has a separate market and does not compete against each other so you really cannot compare prices. It is almost like comparing apples to oranges. Now some plants have had modifications to burn a blend of the two, though they are few and far between.

Ash - the utilities get money back for this. While they may not completely recover the cost, they can sell it for cement plants and other uses.

The thing that has killed Mid-west coal is the sulfur content. It is really high compared to PRB and other coal. To burn it, you need a huge investment in pollution control equipment.

Met coal - only a small part of the coal out there is met coal. I am not sure of the percentage. The Pocahontas and the Pittsburgh #6 are the most famous ones in the east.

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ps. How do you pronounce Uinta? Is that an indian name?

Very good, Ed. Be sure to pronounce the “U” as “you,” not “ou,” and stress the middle syllable. The first time I had occasion to pronounce the name of the area was when I was north of it while riding the City of Portland to Chicago, on 16 April 1971. The UP conductor gently corrected my pronunciation.

Incidentally, the Uintah range runs east-west, and not, in general, north-south, as most mountain ranges in this continent run. It’s cold in the high Uintahs; I am glad I do not live in Vernal, Roosevelt, or any other place up there.