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Illinois Basin coal likely to face increased price competition from NAPP: consultant

Hollywood, Florida (Platts)--13 Mar 2015 344 pm EDT/1944 GMT


A "rumble on the river" is shaping up in the US thermal coal industry, as more Northern Appalachia coal could move down the Ohio River to compete with Illinois Basin coal, an Energy Ventures Analysis consultant said Friday.

Increased production from Murray Energy's NAPP mines, partly to offset costs stemming from the company's acquisition of several former Consol mines in the region, could lead to "lots of competition" between Northern Appalachia and the Illinois Basin, Emily Medine, a principal with Arlington, Virginia-based Energy Ventures Analysis, said at the Platts Coal Properties & Investment conference in Hollywood, Florida.

Caryl Pfeiffer, the director of corporate fuels for LG&E/KU, told the conference the utility has historically burned NAPP coal at its Ghent plant, but that she "would not be surprised if we get NAPP bid into us competitively" for its current system-wide solicitation.

LG&E and KU, Kentucky's largest electric utilities, typically burn 14 million-15 million st of coal annually.

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While NAPP could be a threat, the Illinois Basin is well poised to capture more market share, especially considering average production costs are in the low $30s/st, said Medine.

By comparison, Central Appalachia coal has production costs roughly averaging $60/st, according to publicly-filed documents from some of the larger US producers.

Medine noted that coal production in the Illinois Basin has grown nearly 50% in the last 10 years, partly due to power industry's new appetite for the lower-priced, high sulfur coal from the region.

"One reason the IB market is healthy is because of environment regulations," Medine said. "We have lots of coal on the river because of these rules. Without those rules, we would probably be in worse shape today."

Increased production has put downward pressure on prices, so producers are looking to trim operating costs, "so we are seeing some rationalization," he said.

While exports have been largely shut off due to current market conditions, Medine said the region has considerable export potential despite its generally higher sulfur. She noted a recent EVA-commissioned study that found 18 different countries imported Illinois-sourced coal in 2012.

A challenge for growing exports is the acceptance of index-based pricing, which foreign markets prefer, said Medine. The CME Group launched a physically-settled 11,5000 Btu/lb, Illinois Basin over-the-counter contract last October, but it has yet to trade.

On Thursday, Platts assessed the front-month Illinois Basin 11,500 OTC contract at $30.60/st, based on broker marks.

The traditional price, however, is much higher, partly due to the discrepancy with the high chlorine content -- 0.35% maximum -- in the futures contract.

Platts on Friday assessed 11,500 Btu/lb, 5 lbs SO2 coal FOB Barge at $38/st for prompt-quarter delivery.

"On an international basis, it's very attractive to be able to buy on an index, or to buy and hedge against another index, so when the market turns, there is lots of opportunity for [export] growth," Medine said.

Other challenges facing the Illinois Basin are low natural gas prices, but those pressures could ease as the nation's LNG export capacity grows, likely starting in 2018.

--Andrew Moore, andrew.moore@platts.com
--Edited by Richard Rubin, richard.rubin@platts.com




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