Coal demand by US electric generation and industrial customers is expected to increase to 1.123 billion tons by 2015 from 980 million tons in 1998, according to a new study by GRI, Chicago, and Hill & Associates Inc., Annapolis, Md. After 2015, US coal use is projected to decline to 1.101 billion tons by 2020 due to stricter environmental regulations.
The study also projects that the average real (1999 dollars) FOB mine-mouth coal price will continue to fall. The real FOB price is projected to decline to $12.62 from $15.79/ton during 1998-2020, due to continued improvement in productivity, lackluster growth in demand, and an increase in the market share of low-cost Western coals.
"The key to the continued viability of coal as a fuel option has been productivity improvement," said Kathy Nice, GRI principal energy analyst. "Coal-mine productivity has increased steadily since 1978, at 6.5%/year. While some in the coal industry believe that productivity improvement will slow sharply and will no longer be able to offset inflation, there has been virtually no evidence to support this view over the past 20 years. Improvements in technology and competitive market pressures are expected to continue to drive productivity higher."
Among the study's other key findings are:
� The availability of adequate coal supplies depends on the timely opening of new mines. The last series of expansions led to surplus deliverability and low prices. Given this experience, producers may be unwilling to expand capacity ahead of demand requirements. Future supply expansions are likely to be completed in a more measured fashion.
� In the near term, western low-sulfur coal, primarily from the Powder River basin, is projected to increase its share of total US coal production to more than 55% by 2005 from 52% in 1998 at the expense of eastern coal supplies. Post-2005, eastern coal is expected to regain market share as more scrubbers are built, allowing increased consumption of higher-sulfur coal from the North Appalachia and Illinois basin.
� Major rail consolidations in the western and eastern US have created turmoil in transportation markets in recent years. In the short term, these problems have provoked dissatisfaction with rail service. However, these mergers have also helped keep transportation costs stable. There have been no significant increases in overall rail rates since the early 1980s. These productivity improvements are expected to continue, and, as a result, rail rates are not anticipated to increase over the projection period, putting no upward pressure on delivered coal prices.
� The wild card in coal markets will continue to be environmental regulation. Regulations are expected to require the coal industry to further reduce sulfur dioxide, nitrogen oxides, and fine particulate emissions. Calls for regulation of mercury emissions (and other trace toxic materials) are expected to grow. Ultimately, there are likely to be limits on carbon emissions. While the full impact of the anticipated regulations are unknown, they are expected to put downward pressure on coal prices because of the capital investments generators will need to make for coal to remain a viable fuel option.
� Demand for US coal exports grew sharply starting in the late 1970s. However, export demand for coal has declined due to growing environmental concerns in Europe, weak economic growth in Asia, and new low-cost international competitors. Exports are projected to decline to 24 million tons in 2020 from 78 million tons in 1998.