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AEO2014: coal prices and productivity

World Coal,

The US Energy Information Administration (EIA) forecasts US minemouth coal prices to increase 1.4% per year in its Annual Energy Outlook 2014 (AEO2014) Reference Case as coal-mine productivity continues its long decline. As a result, prices hit US$2.96/million Btu, rising from US$1.98/million Btu in 2012.

Coal mine productivity by region

Regionally, the Reference Case sees average minemouth coal prices increase by 1.6% per year from 2012 to 2040 in Appalachia as mine productivity drops. A rise in the proportion of metallurgical coal in Appalachian production also helps to push up prices, as its thermal coal production remains uncompetitive when compared to other regions. Appalachian thermal coal prices hit US$3.16/million Btu in 2012.

In the Western Region, which includes the Powder River Basin, coal prices rise by 2.1% to 2040 as stripping ratios continues to push costs higher.

The Interior Region, which includes the Illinois Coal Basin, sees the most optimistic forecasts for mine productivity on the back of increased output from large, highly productive longwall mines. Coal prices here rise by only 1% per year to 2040.

Variations to the Reference Case

The AEO2014 also includes two alternative scenarios for coal prices – a High Coal Cost Case and Low Coal Cost Case – which vary the regional productivity growth rates by 2.3 percentage points below and above the Reference Case, respectively. These cases also vary the costs of coal miner wages, mine equipment costs and coal transportation rates to between 24% and 31% higher than the Reference Case in the High Coal Cost Case and 25% lower in the Low Coal Cost Case.

The impact these variations has on the coal price is substantial with prices rising by 87% above the Reference Case in the High Coal Cost Case, but dropping by 45% in the Low Coal Cost Case. In turn, this radically alters coal’s competitiveness in the energy mix, substantially impacting coal production by 2040. 

This should drum home to the US coal industry the need to push productivity at coal mines. As Joseph Van Den Berg, Owen Ward and Jason Palmenberg, Booz & Co., wrote last year in World Coal: “Coal’s competitiveness will be determined not just by external political and market forces but also by coal pricing, driven in part by coal mining productivity.” As a result, “players must reboot, retool and regain their competitive footing by focusing on what they can control: costs and productivity.”

Edited by Sam Dodson

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