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Exports Support Illinois Basin Producers: During a time of declining domestic demand, exports brought much-needed business and will likely continue to do so.

From 2000 to 2014, Illinois Basin (ILB) production, which includes Illinois, Indiana and western Kentucky, was on the upswing. It expanded by more than 50 million tons due to strong demand from the scrubbed power plants and export markets. In 2014, ILB production nearly reached 137 million tons. The momentum carried into the first quarter of 2015 as ILB mines produced 35.4 million tons (142.2 million tons on an annualized basis), but it would not last. Low natural gas prices, subsidized renewables (wind), lower exports and a mild winter burn caused U.S. coal demand to drop dramatically. Stockpiles bulged at both the mines and the power plants.

According to stats from the Mine Safety Health Administration (MSHA), ILB production totaled 123 million tons during 2015 before dropping to 98.5 million tons in 2016. A strong export market and higher natural gas prices allowed ILB production to expand to 103.2 million tons in 2017.

Buoyed by stronger exports, year-end 2018 ILB coal production topped out at 107.2 million tons. Fourth-quarter 2018 ILB production was 109 million tons on an annualized basis--the highest level since Q1 2017. What does the future hold? Much of that answer lies beyond the control of ILB coal operators, but it's safe to say exports will play a much larger role in the outcome than in year's past.

Recent ILB Trends

Historically, Illinois has been the largest-producing state in the ILB. Indiana and western Kentucky vied for the No. 2 spot; however, Indiana has gained the upper hand since 2016.

During 2018, 54 mines produced coal in the ILB. Of these, 17 mines produced more than 2 million tons representing 86.6 million tons, or 81% of total ILB production. The largest mine is Foresight Energy's Sugar Camp longwall complex, which produced 14.4 million tons in 2018.

Alliance Resource Partners' River View mine is the second-largest ILB coal mine. A large room-and-pillar operation in western Kentucky, River View produced 9.8 million tons in 2018. After adding an 11th continuous miner section, it is expected to produce 11 million tons in 2019. Peabody Energy's Bear Run mine in Indiana produced 7 million tons, making it the largest surface mine currently operating east of the Mississippi River.

If Sunrise Coal's Oaktown Nos. 1 and 2 mines were combined, they would be ranked fourth at 7 million tons. The complex could have been the third largest, but the company was forced to reopen its idled Carlisle mine to retain some coal leases that required attention or they would lapse. As a result, the company moved a continuous miner unit from its Oaktown No. 1 mine during the third quarter of 2018 to Carlisle.

During 2018, Alliance was the top coal-producing company with 29.9 million tons or 29% of the ILB market. During 2016, Alliance's production dropped by nearly 10 million tons as it closed several mines in a down market. With 25.4 million tons of production in 2016, Alliance still controlled 25% of the ILB market. In 2017, Alliance produced 27.3 million tons and controlled 26% of the ILB market.

Now that Robert E. Murray has control of Foresight Energy and Armstrong Coal, he is now the second-largest operator in the ILB controlling 27% of the market with 28.6 million tons produced during 2018. Peabody Energy controlled 18% of the market with 18.6 million tons produced.

ILB Exports

From 2005 through 2012, exports increased from 300,000 tons to 17.1 million tons. Due to low API2 prices, exports dropped to 10.3 million tons in 2015 and an estimated 6.5 million tons in 2016. ILB exports would have been lower except that during late 2016, the API2 index increased substantially, which caused a surge in exports during the fourth quarter.

Continuing strength in the export market allowed ILB exports to increase to 11 million tons in 2017. As much as 20.4 million tons of ILB coal may have been exported during 2018, although that has not been confirmed yet. With a weakening of the API2 price in 2019, that figure could drop to 15.3 million tons by the end of the year with an upside potential of that matching 2018.

Historically, Foresight Energy and Murray Energy have been the leaders in ILB coal exports. Representing 84% of total ILB exports, the top ILB exporters during 2012 were Foresight Energy (6.3 million tons) and Murray Energy (4 million tons). In 2014 and 2015, all but Foresight Energy and Murray Energy dropped out of the ILB export market.

In 2017, Foresight exported 5.8 million tons and increased that to 8.9 million tons in 2018. For 2019, Foresight could ship a minimum of 6 million tons into the export market and possibly as much as 9 million tons. Most, if not all, of Foresight Energy's and Murray Energy's coal is exported through the SunCoke Convent Marine Terminal in Louisiana. For 2019, Foresight has publicly stated it has a minimum of 6 million tons of exports planned.

Thanks to its low sulfur production from its Gibson mine complex in Indiana, Alliance jumped into the market in late 2016 and exported around 5 million tons in 2017. During 2018, Alliance reopened its 2.5-million-ton Gibson North mine, mainly to supply the Indian export market. Alliance's exports increased to around 10 million tons in 2018 as a result. Some of the coal moves via the Norfolk Southern Railway to Lambert's Point in Norfolk, Virginia, with most of the rest moving through New Orleans, mainly through Trafigura's Burnside Terminal. Additional shipments are believed to have moved through Mobile. For 2019, Alliance may have contracted a minimum of 8 million tons into the market with some upside potential of matching that of 2018.

Knight Hawk, which is 49% controlled by Arch Coal, exported a small amount of coal in 2012 and 2013. Last year was a banner year with Knight Hawk exporting slightly under 700,000 tons. For 2019, they have plans to ship up to 1.2 million tons into the export market. It is believed most of Knight Hawk's export coal moves down the Mississippi River and is transloaded into vessels by midstreamers.

Determining the future of ILB exports is problematic due to several take-or-pay throughput agreements that ILB producers have with Convent Marine Terminal. The terminal has direct rail access and the current capability to transload 15 million tons per year of coal. The facility is supported by long-term contracts with volume commitments covering substantially all of its current capacity.

Trafigura, with its purchase of the Burnside Terminal, turned the Burnside facility into a state-of-the-art bulk terminal. Phase I provided for barge to vessel and Phase II added CN rail to vessel.

Gulf Coast export capacity was greatly expanded through the midstream loading of vessels. Three companies (Associated Terminals, St. James Stevedoring and Cooper Consolidated) have developed significant midstream loading capabilities in the Gulf. It should be noted that the Kinder Morgan Deepwater Terminal in Texas currently only exports petcoke, but they had plans to export coal in the future.

Historically, ILB coal has mainly been exported to Europe and priced against the API2 coal index. Due to cost, the U.S. has and will always be a swing supplier in the global seaborne trade of coal. However, this does not mean there are no opportunities.

The international markets have been driven by China and India and to a lesser extent the Middle East (mainly Turkey). In 2017, China imported more than 255 million metric tons (mt). Indian thermal coal imports increased 19% to 172 million metric tons in 2018, marking the fastest pace of growth since 2014, according to data from American Fuels & Natural Resources, a Dubai-based trader of U.S.-origin coal. India imported more than 52 million mt of coking coal in 2018, up 14% from 56 million mt in 2017, American Fuels' data showed.

The biggest game changer for U.S. coal exports has been a ban on petroleum coke around the Indian capital of New Delhi starting from early November 2017, which required the country to raise its imports of coal to replace the fuel.

ILB coal exported today is a minimum of 11,450 Btu/lb and up to 12,400 Btu/lb, so ILB coal has a heat content advantage over the spec coal. However, with ILB coal averaging about 2.5% sulfur, it has a sulfur disadvantage with the spec coal. This forces consumers to blend ILB coal with low sulfur coal to meet the spec of <1% sulfur content. Reports are that when adjustments are made, ILB high sulfur coal must take a hit of 10% to 20% off of the API2 index (known as the sulfur discount).

Recent statistics have shown that ILB coal exports are tied less to the API2 price than in previous years due to increased shipments to Indian and Middle Eastern markets. Now with Turkey possibly reducing its tariff to 5%, more opportunities might be presented for ILB coal exporters.

Future Developments

Hanou Energy has surveyed all of the ILB coal producers, and has conducted independent research on the planned and potential mine expansions and mine openings. No attempt has been made at determining which mines will succeed in opening or expanding. Planned production is production that is likely to come on if markets develop.

The effort identified numerous mine projects that are on the drawing board, but are considered to be long shots for development for a variety of reasons.

Assuming natural gas prices of $3 per million Btu or higher, total ILB demand (domestic and exports) could increase to 125 million tons by 2020. An analysis of ILB planned production indicates there is enough production capacity to easily meet this demand. On the flip side, if natural gas prices remain at low levels ($2.50 per million Btu or less), ILB domestic demand drops to 77 million tons in 2020. The export market could still represent an additional 10 million to 20 million tons.

Since 2005, the weighted average age of coal-fired power plant retirements is 50 years old. No new coal-fired power plants are planned for the U.S. Therefore, it's likely that more coal-fired power plants will be retired moving forward, so domestic demand for ILB coal will diminish.

According to Hanou Energy, if gas remains at $3 per million Btu or higher, domestic ILB demand could drop to 60 million tons by 2038 due to coalfired power plant retirements. If gas prices remain at $2.50 per million Btu or lower, domestic demand for ILB coal could drop to 40 million tons by 2038. The export market represents the best opportunity for additional growth moving forward.

John T. Hanou is principal with Hanou Energy. This article was adapted from a report he recently published, Illinois Basin Coal Supply Study 20192028. To obtain a copy, email jthanou@hanouenergy.com.
2018 Largest Illinois Basin Coal Mines
by Company and Mine

Mine
State     Parent/Operator                 Mine Name

IL        Murray/Foresight-S Camp         Sugar Camp 1 &2 (MC-1 & 2)
WKY       Alliance/River View             River View
IN        Alliance/Gibson Cty             Gibson South
IL        Murray/Foresight/Williamson     Pond Creek (Mich #1)
IN        Peabody/MW Mining               Bear Run
IL        Prairie State                   Lively Grove
IL        Alliance/Hamilton               Mine No. 1 (White Oak)
IN        Hallador/Sunrise                Qaktown Fuels Mine No 1
IL        Arch/Knight Hawk                Prairie Eagle UG
WKY       Alliance/(Warrior               Cardinal #2
IL        Peabody/Gateway                 Gateway North
IN        Hallador/Sunrise                Oaktown Fuels Mine No 2
IN        Peabody/MW Mining               Wild Boar (Eby)
WKY       Alliance/Webster Cty            Dotiki
WKY       Murray/WKY Res. (Armstrong)     Genesis (Kronos UG)
IN        Peabody/MW Mining               Francisco Mine--UG Pit
IN        Peabody/MW Mining               Somerville Central (No. 1)
IL        Murray/Foresight-Macoupin       Shy No. 1
IL        Arch/ICG                        Viper
WKY       Murray/M_berg Cty (Armstrong)   Pride (Survant)
IN        White Stallion/Solar            Shamrock
IN        White Staliion/Solar            Antioch
IN        White Stalion/Vigo              Liberty
IL        Peabody/MW Mining               Wildcat Hills Underground
WKY       Royal/Rhino                     Riveredge
WKY       Murray/KenAm                    Paradise #9
IL        White Stallion/Vigo             Friendsville
IL        White Stallion/Eagle Rvr.       Eagle River--Mine No. 1
IN        Alliances/Gibson Cty            Gibson North
IN        White Stallion/Solar            Cannelburg

          Other (24 mines)                Other (24 mines)

Mine      Status            Mine          2018 Production
State                       Type              (mmt)

IL          A               U-LW               14.4
WKY         A               U-CM                9.8
IN          A               U-CM                7.0
IL          A               U-LW                6.9
IN          A               S-DL                6.9
IL          A               U-CM                6.3
IL          A               U-LW                6.3
IN          A               U-CM                4.1
IL          A               U-CM                3.9
WKY         A               U-CM                3.5
IL          A               U-CM                3.1
IN          A               U-CM                2.9
IN          A                S                  2.6
WKY         A               U-CM                2.5
WKY         A               U-CM                2.4
IN          A               U-CM                2.1
IN          A               S-DL                2.0
IL          A               U-CM                1.9
IL          A               U-CM                1.7
WKY         A               U-CM                1.5
IN          A                S                  1.4
IN          A                S                  1.4
IN          A                S                  1.3
IL          A               U-CM                1.3
WKY         A               U-CM                1.3
WKY         A               U-CM                1.1
IL          A                S                  1.0
IL          A                S                  1.0
IN          A               U-CM                0.9
IN          A                S                  0.8
                                              103.3
           NA                NA                 4.0

                                              107.2

Distribution of Illinois Basin Coal--2018
In Thousands of Short Tons

Industrial Plants Excluding Coke,         4,190,4%
Exports, 20,500,                               19%
Coke Plants,                                  0,0%
Commercial/Institutional,                   378,0%
Electric Power Sector,                  84,856,77%

Source: EIA, Hanou Energy

Note: Table made from pie chart.

Illinois Basin Coal Exports
2000-2017, 2018 Estimated

Thousands of short tons

                  2000     2001     2002     2003     2004     2005

West Kentucky       0       114      0        15       188      22
Indiana             0        0       0        0        227      11
Illinois            0        0       0        0        440     284

                  2006     2007     2008     2009     2010     2011

West Kentucky       0       679     3,870    3,677     989     1,630
Indiana            240      282      111       0        0       642
Illinois           799      565     3,019    2,510    2,506    5,472

                  2012     2013     2014     2015     2016     2017

West Kentucky     3,300    1,044     92        0       96       161
Indiana            300      11       85       20       172     1,400
Illinois         13,500   12,186   10,170   10,269    6,250    9,475

                  2018
                 (Est.)

West Kentucky     4,400
Indiana           4,000
Illinois         12,100
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Title Annotation:ILLINOIS BASIN
Comment:Exports Support Illinois Basin Producers: During a time of declining domestic demand, exports brought much-needed business and will likely continue to do so.(ILLINOIS BASIN)
Author:Hanou, John T.
Publication:Coal Age (1996)
Geographic Code:1U3IN
Date:Jun 1, 2019
Words:2369
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