Coal industry's cyclical upswing will persist, Kennecott CEO says

Washington (Platts)--28Sep2005

Although the coal business is cyclical, Bret Clayton, president and CEO of
Kennecott Energy, predicted that the coal industry would enjoy good times for
another decade. Contributing to the rosy outlook is the explosive
industrialization of China, which is "sucking up" raw materials to feed its
expansion. 

Growth in China will continue for several years, and therefore will continue
in the United States. Markets will be "very volatile" but "it's going to
continue to be very strong," he told the audience at Platts Coal Marketing
Days in Pittsburgh Tuesday morning.

As for the down side, Clayton said he did not know when the decline will come
or where, but since the market is cyclical, it will. 

However, now "people are starting to accept that coal has to be a part of the
energy supply in the US -- we shouldn't get too giddy about that." 

In a renaissance of the coal industry in North America, Clayton predicted that
higher price levels will continue and terms of contracts will lengthen.
Kennecott is closing deals now that extend for three to four years at the
higher prices, he said. Powder River Basin prices have "finally moved up"
after seeing the eastern coal prices so strong. The strength is spurred by
demand that he sees continuing. 

Growth brings its own worries 

However, with increased demand, Clayton noted that the industry is now dealing
with equipment shortages, which slow production increases, as well as longer
lead times to order equipment and a shortage of people to operate the
equipment. "Even trying to meet demand -- even the simple things like that --
is becoming tough." For example, explosives costs for Kennecott are up 35%
over the previous year, due to higher gas prices. 

To ease transportation worries, Kennecott is "trying to put more coal on
water. This is not going to be a lot, obviously," but a portion of production
is traveling by barge. In St. Louis, Kennecott is blending PRB and Illinois
Basin coal for some customers. 

And he mentioned environmental concerns. Coal consumption increases have
coincided with emissions declines, he said. Between 1970 and today, coal-fired
generation is up 180%, while emissions are down significantly. The industry
has to continue reducing emissions, but Kennecott is not a supporter of the
Kyoto Protocol. The greenhouse gas reductions treaty "won't drive us to where
we need to be," Clayton said. Mercury reductions and climate change
improvements "will be solved with technology" globally. Rio Tinto, Kennecott's
parent, is a supporter of the FutureGen project to develop a coal-fired
generating plant with zero emissions.

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