The Illinois state government could do various things to encourage and sustain a growing level of exports of mostly high-sulfur coal to other countries, said a new study released April 30 by the Illinois Department of Commerce and Economic Opportunity and its Office of Coal Development.
The report was written by Emily Medine, principal of consulting firm Energy Ventures Analysis.
Illinois, which has the largest reserves of bituminous steam coal in the U.S., has the capability to produce significant quantities of coal in excess of growing domestic demand for the export market, the study said. This coal is well suited to the large and growing global coal market due to its low production costs (mostly from longwall-equipped deep mines), access to the Gulf of Mexico by barge or train for vessel loading, and the increased ability for global customers to use this quality of coal.
Exports of Illinois coal increased substantially between 2010 and 2012, from 2.5 million tons (Mt) in 2010 to 5.5 Mt in 2011 with preliminary estimates for 2012 showing more than 13 Mt. The primary reasons for the increases were the growth in the global steam coal market, marketing efforts by coal producers and traders, the increased acceptance of Illinois-quality coal, and, most importantly, the competitiveness of Illinois coal versus alternative sources available in the global market, Medine noted.
The Illinois Office of Coal Development (OCD) engaged Energy Ventures Analysis (EVA) to review what activities OCD and parent agency the Department of Commerce and Economic Opportunity (DCEO) could pursue to support higher exports. To this end, EVA developed an action plan in conjunction with OCD. It consists of activities categorized by timing and priority. The items included in the action plan were based on interviews with a number of current and potential Illinois coal producers, traders, and EVA’s databases and analysis.
The recommendations fall generally into three categories:
- Those that relate to enhancing the competitiveness of Illinois coal exports;
- Those that relate to supporting smaller producers in their marketing efforts; and
- Those that relate to expanding global awareness of Illinois coal.
The competitiveness of Illinois coal is enhanced by the ability of producers to efficiently transport Illinois coal to markets throughout the world. As a result, the recommendations include:
- Selective investments to support efficiency improvements in loading coal at Illinois mines and at rail- or truck-to-barge terminals on the Mississippi and Ohio rivers;
- Financial or political support for minimized disruptions of commerce through channel improvements on the Mississippi River, the key pathway for barging this coal to Gulf Coast export terminals; and
- Investment of resources to facilitate the loading of larger vessels to be loaded in the Gulf area.
Domestic and export markets are very different
The marketing of Illinois coal in the export market is dramatically different than marketing Illinois coal domestically, with most of that high-sulfur coal going to scrubbed power plants, many of which got their scrubbers only recently. Smaller producers, and producers without export experience, face challenges regarding the identification of counter-parties, handling logistics of moving coal to the typical point of sale, i.e., FOB vessel, and managing the commercial risks.
Several ways in which the OCD can help support producers with these matters were identified. The efforts to expand global awareness of Illinois coal can be enhanced through increased use of State trade representatives to educate potential buyers about the advantages of Illinois coal and trade missions. The state may also encourage foreign investment in Illinois coal mines, particularly where such investment may lead to exports, the report noted.
Global steam coal trade has doubled over the last decade, growing from just under 400 million tonnes in 2002 to over 800 million tonnes in 2012. The growth has been driven primarily by increased demand in Asia. Where China once was a net exporter of coal, the tables have turned with modernization, and China has become a net steam coal importer. Imports also have grown in South Korea, India, and other countries, underscoring the increased importance of the Pacific market.
The result is that Illinois coal was shipped to at least 18 countries in 2011 and 2012, including: Canada, Mexico, Dominican Republic, and Chile in the Americas; Belgium, Denmark, Finland, France, Great Britain, Germany, Holland, Ireland, Portugal and Spain in Europe; and China, India, Pakistan and South Korea in Asia.
The Illinois Basin consists of coal-producing areas in Illinois, Indiana, and Western Kentucky. This bituminous coal is sold as “steam” coal to the electric power sector, with an average heat content ranging from 10,000 to 12,500 Btu/lb and mostly over 2% sulfur.
The Illinois Basin has experienced enormous changes over the last two decades as production declined from the peak levels experienced in 1990 of over 140 million tons to a low of 88 million tons in 2003, the report noted. The decline reflected the combination of new air pollution control requirements and penetration of Central States markets with low-sulfur coal from the Powder River Basin of Wyoming. “However, a coal renaissance in the Illinois Basin began in the middle of the last decade as a result of increased domestic demand,” the report added. “Production within the basin gradually shifted during the time frame, away from output from Indiana surface mines to the benefit of underground mines in Illinois, where producers have increased the use of cost-effective longwall mining.”
The increased U.S. demand lately was also driven by the gradual retrofit and modernization of the nation’s coal fleet, primarily the addition on many existing power plants of scrubbers, also known as flue gas desulfurization (FGD). The improved emissions controls have allowed an increasing number of Midwest and Eastern power producers to switch to Illinois Basin coal, or, in some cases, switch back to Illinois Basin coal. This domestic growth has also been augmented in recent years by the development and growth of an export market.
Over the last 10 years, Illinois’ share of production has ranged between 32% and 38% of total Illinois Basin production. In 2012, 10 producers operating 22 mines accounted for all of Illinois coal output. The three largest producers – Chris Cline’s Foresight Energy, Robert Murray’s American Coal and Peabody Energy (NYSE: BTU) – accounted for over 70% of 2012 Illinois production.
Since 2010, 10 new mines have been developed, or are in development stages in Illinois. At full production, the announced new mines would add over 40 million tons of annual production capacity. Four of the new mines are longwall operations, each of which is expected to produce between 6.0 and 8.0 million tons per year. The growth in Illinois production is greater than the projected growth in the other parts of the Illinois Basin. As a result, Illinois’ share of total production is expected to continue to lead basin tonnage growth over time.
New mines to produce more coal than needed in the domestic market
The potential increase in Illinois coal supply exceeds domestic demand requirements. As a result, in order for this growth to be realized exports of Illinois coal need to be expanded, the report pointed out.
Sales to end users are generally made on the basis of what is called Free On Board-Trimmed (FOBT), meaning all costs of shipping from the mine to the Gulf and loading on a vessel must be handled by the coal producer or seller. A seller also can handle these logistics by selling the coal Free On Board (FOB) at the mine, using coal traders or other third parties to move and load the product. The two largest Illinois coal producers typically handle the logistics from the mine to the vessel by themselves. Other producers generally sell FOB mine/FOB barge to traders, the report said.
A large number of traders are participating in Illinois Basin coal trades. Traders believed to be active include E.ON, EDF, Coeclerici, Glencore, Goldman Sachs (J. Aron), JP Morgan, Mercuria, RWE Trading, Trafigura and Vitol, the report added. Traders have been instrumental in developing the export market for Illinois coal because of the breadth of their market access, their ability to manage logistics and/or their willingness to commit to purchase tonnage as part of their trading “book” of coal rather than for a specific customer. Traders also can play a significant role by improving the counter-party credit risk of dealing with far-away buyers, a risk that can be substantial when selling coal overseas, the report pointed out.