The U.S. coal industry is facing an even more uncertain future as the impacts from weaker demand and environmental regulations are creating more contractual volatility from the utilities to the railroads, according to a recent report.
In its most recent Form 10-K, Alpha Natural Resources Inc., a major player in Central Appalachia coal markets, warned investors that the increasing difficulty of locking in long-term contracts could reduce the company’s protection from short-term coal price volatility, according to a report by SNL Energy.
“Alpha said that in 2013, about 45 percent of its steam coal was delivered through long-term coal contracts,” according to the report.
“In large part as a result of increasing and frequently changing regulation … and natural gas pricing, electric power generators are increasingly less willing to enter into long-term coal supply contracts, instead purchasing higher percentages of coal under short-term supply contracts,” Alpha wrote in its filing. “This industry shift away from long-term supply contracts could adversely affect us and the level of our revenues.”
Arch Coal Inc. expresses a similar concern in a section of its Form 10-K.
“Changes in the coal industry may cause some of our customers not to renew, extend or enter into new long-term coal supply agreements with us or to enter into agreements to purchase fewer tons of coal than in the past or on different terms or prices,” the filing states. “In addition, uncertainty caused by federal and state regulations, including the Clean Air Act, could deter our customers from entering into long-term coal supply agreements.”
According to an SNL Energy analysis of fuel contract data from the U.S. Energy Information Administration supplied on Form EIA-923, the prized long-term coal contract appears to have become more elusive in the past four years.
In March, 16 percent of coal delivered came from contracts with remaining terms beyond five years, down from 20 percent in the same period in 2010.
In increasingly competitive markets, a long-term coal contract can offer price, volume and earnings stability that allows companies to make long-term planning decisions regarding their mines.
“Obviously, any time you’re producing any product, having the benefit of a long-term contract creates stability in production, employment, available resources to produce the product, etc.,” Bill Bissett, president of the Kentucky Coal Association, told SNL Energy.
Peabody Energy Corp., a company that heavily utilizes long-term contracts, has seen some of its contracted position contract. According to its most recent Form 10-K, the company has seen its worldwide sales under long-term coal supply agreements shrink from 91 percent in 2011 to 80 percent by 2013.
Vic Svec, senior vice president of global investor and corporate relations at Peabody, told SNL Energy that contracts have become shorter, but the response to depleting inventories would vary based on whether the utility is a co-op, a regulated utility or an unregulated utility.
“They certainly could turn a little longer term in nature for the reasons like we saw this past winter, when inventories got low,” Svec said. “Ultimately, it will be up to the generators — whose job is to provide reliable and low-cost electricity — to determine the right duration and decide this is how much they stay hedged. That will be very individualized.”
Keep reading the full report and analysis online at http://www.snl.com/InteractiveX/Article.aspx?cdid=A-28607197-10032
(Fred Pace is the Editor for the Coal Valley News. He can be contacted at firstname.lastname@example.org or at 304-369-1165, or on Twitter @fcpace62)