"The price now is very high, at or near record levels," said Jim Thompson, editor of Coal and Energy, an industry newsletter based in Knoxville, Tennessee.
"This summer, if it's hot, it could have an extreme impact on the supply of electricity. If conditions don't change, coal prices could take a considerable upward turn."
Mark Reichman, a coal industry analyst with A.G. Edwards, increased earnings
estimates for both Arch Coal "The outlook for 2004 and 2005 remains constructive and we expect coal
prices to increase or remain firm based on increasing consumption related to
strengthening base load demand for electricity," he wrote in a research
note.
In another note, Reichman said: "Arch still has a significant leverage
to strengthening coal prices with approximately 35 percent of its expected
production for 2005 and 50 percent of its planned output for 2006 still to be
priced."
According to the National Mining Association, some 95 percent of the
approximately 1.2 billion tons of coal mined in the United States each year is
sold to power plants.
Those plants are turning more to coal to generate electricity right now
because of the high price of oil and natural gas. In turn, that is reducing coal
stockpiles by as much as 50 percent. CHALLENGES AND RISKS
One utility, Allegheny Energy "Obviously there are a number of challenges and risks that can
negatively impact us," said Chairman, President and Chief Executive Officer
Paul Evanson.
"Some are short-term like the current spike in coal spot prices coming
at a time when we have some long-term contracts expiring at the end of this year
and next."
Allegheny's Chief Financial Officer Jeff Serkes said the issue of coal price
was crucial. "We're 99 percent hedged for this year ... and for next year
we're 60 percent hedged. We're continually talking with our suppliers,
especially our largest supplier, trying to work something out.
"Right now spot prices are quite high, so we're hesitant to lock
something up today. But we would expect and hope to get something below the spot
price because we are a big purchaser and we have one very large supplier,"
Serkes said.
A decade ago, power companies typically had long-term contracts for coal of
10 years. But a recent shift toward shorter-term contracts has raised fears that
production could suffer, pushing up prices for the key energy source.
Coal and Energy's Thompson said utilities have a certain percentage of coal
supply needs under contract and buy the rest on an annual or spot basis. Spot
now is one year or less, while long-term is 3-5 years.
An added problem this year has been railroad delays causing distribution
disruptions, he said. "Eastern railroads are shorting people on services
and with natural gas prices high, supplies are strained."
Allen Brooks, an analyst for the Canadian Imperial Bank of Commerce, noted
that, on average, coal-fired plants have 40 to 45 days of supplies, down from
the 60 to 90 days that was normal during the 1990s.
He gave three explanations for this situation -- rail delivery problems, high
natural gas prices forcing power plants to burn more coal and high coal prices
making users reluctant to build inventories.
"Is this a serious problem? Maybe it is, or maybe it isn't. A lot will
depend on the summer weather. If we have a hot summer with substantial air
conditioning demand, it could become a problem," said Brooks.
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