More than meets the eye in US coal exports

The US coal market and its interaction with the seaborne market is more nuanced than is often given credit.  The US itself has a range of qualities, cost structures and infrastructure issues depending on where the coal is produced and being exported from.  This is important in understanding how much coal the US could be exporting going forward.

I like to think of the US coal export equation in 3 parts.  First is the high quality but high cost coal that comes from central and north Appalachia, which is generally exported from the East coast ports in Norfolk (Hampton Roads) and Baltimore .  This is very high CV coal, which can pass for low grade met coal when that market is tight.  But a substantial chunk of it is also high cost.

Over the last twelve months we saw an explosion of this coal hit the market which has tapered off into year end.  The surge was largely on the back of the combination of a disastrous domestic market and the arbitrage into European coal prices.

But that arbitrage opportunity has now closed, while the domestic market is somewhat less bad. Shipments from the East coast are reportedly better in Jan, but its hard to see them remaining at high levels at current prices. Destocking may still be an issue, but can't last forever.

Shipments from the gulf ports have a different cost structure as generally there are more blends, particularly involving Illinois Basin coals.  These are also very high CV, but are high in sulfur, which until recently had no market.

These coals remain competitive in the seaborne market despite low prices and are becoming more accepted in Europe and in markets like India and China.  Shipments are also less constrained by infrastructure as its easier to implement more barges and transhipping.  So while these shipments pulled back in 2H12 as well, they are likely to remain stronger over the forecast horizon.

The final part is the low cost PRB coal that leaks out of the West Cost via Canadian ports.  This is infrastructure constrained in the foreseeable future given expansions at Ridley and Westshore are contracted out to Canadian producers.  There are plans to add port capacity in Washington State, although this remains controversial and unlikely in the next 3-5 years.

Add it all together and I think that the 48mt of exports in the US in 2012 is likely to be down 4-5mt.

But be sure to keep an eye on the composition, which could tell you more about future potential should a squeeze force the arbs open again.

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