PRB producers may be in for sweet ride

Washington (Platts)--11Oct2005

In the past few weeks, Powder River Basin prices for 2006 deliveries have
risen enough that one analyst suggests the PRB designation should stand for
"Pricing Realization Boom." The rising costs of sulfur dioxide emissions
allowances may be driving the increase. 

Prices for PRB 8,800 coal stayed fairly flat from 1998 through 2000 at under
$5/ton, said James Rollyson of Raymond James Energy in a report released
Monday. Then, prices spiked above $12/ton for PRB 8,800 in early 2001,
eventually dropping back to $5.50-$6/ton until late 2003, when the price
increases started again. 

"After languishing for much of 2004 in the face of rising eastern coal prices,
PRB spot coal prices have increased by 80% this year, with deliveries for next
year continuing to move as much as 50% higher," he said. With sulfur allowance
prices climbing, the outlook for PRB prices "for the next few years is very
strong, which, in our view, justified higher (and growing) estimates and
supports the recent run in stock prices.

"The lower sulfur content of PRB coal reserves, relative to eastern coal
reserves, carries a value. While that value is not enough to offset the
reduced energy content of the coal and/or the long distance transportation
costs of the coal, rising SO2 prices have positive consequences for PRB coal
prices," he wrote. The "coal reserves with even lower average sulfur content
are generating a further premium." 

Breakdowns in the rail system are being repaired, and the major railroads
serving the area have already announced expansion plans to increase capacity
by 120 million-130 million tons/year over the next several years. 

PRB mining costs going up

Expansion, however, will come at a price. Coal mining companies are already
talking about the difficulty of increased mining. In his presentation to
Platts Coal Marketing Days, Mark Roberts, director of new market development
for Kennecott Energy, talked about the PRB coal seam slanting westward, and
with the increased overburden, production costs are going up. 

Given production and transportation factors, Rollyson projected that utilities
looking to burn PRB coal will be competing for any incremental tons available
each year, "which is likely to keep prices at least fairly competitive with
eastern coal on a delivered and Btu adjusted basis." 

The price adjustments will hit the bottom line of the major PRB public company
producers -- Peabody Energy, Arch Coal and Foundation Coal Holdings -- until
2008, he projected. Companies will the least amount of 2006- and
2007-committed coal (Arch and Peabody) are the most likely to benefit from the
run-up in prices, although Foundation will still benefit. 

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