Obscure economic indicators, Part 4.

Obscure economic indicators, Part 4.

Obscure economic indicators, Part 4.

Moneybox
Commentary about business and finance.
Sept. 10 2004 4:50 PM

The Big Sandy

Obscure economic indicators, Part 4: Central Appalachian Coal Futures.

From wind farms to hydrogen-powered cars, alternative power sources are all the rage. But one of the greatest potential alternatives to oil and gas is one of the oldest: coal. It's not renewable, it's not clean, and it's not environmentally friendly. But we've got tons of it (literally). And it's hot. Behold the mighty Central Appalachian Coal Futures, also known as the Big Sandy barge coal contract.

The name may conjure up swimming holes, tubing, and fishing. But the Sandy River, a tributary to the Ohio River that forms part of the West Virginia and Kentucky border, is an industrial waterway. It's the place where coal mined from rich Appalachian seams is delivered. (Here's a description of the area.)

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Traded on the New York Mercantile Exchange since July 2001, the CACF represents spot prices for coal produced in the eastern portion of the United States. Most purchases of coal are conducted through long-term contracts between utilities or steel mills on the one hand and mining companies on the other. The spot prices reflect marginal demand, what buyers need or want beyond the amounts contracted for. And these prices have been spiking. This chart shows that Central Appalachian Coal Futures are up 59 percent this year—to $63 per ton—and that the price has doubled since July 2003. (Here's a Microsoft Excel file showing the raw data.)

Why is this obscure economic indicator rising, and what does its rise tell us?

The recent rises seem to be more about growing demand than concerns about supplies. Ironically, the rise in spot prices for U.S.-produced coal has come at a time when the supply of the commodity seems to be growing. In recent years, even as production from the historic mining terrain in the eastern United States has declined, Wyoming's Powder River Basin has emerged as a significant source. (The Energy Information Administration has invaluable material on its coal home page. Here's a map of states with coal.) "It's a little as if oil prices had gone up despite a new reserve the size of another Saudi Arabia going online," said Chris Briem, a researcher at the University of Pittsburgh. This impressive chart highlights Wyoming's rise as a coal supplier.In 2003, Wyoming accounted for about 35 percent of the nation's 1.07 billion-ton coal production, more than the combined total of West Virginia, Kentucky, Pennsylvania, and Texas. The state, according to the EIA, had more than 66 billion tons of reserves in 2000.

Demand for coal seems to be rising domestically. In the United States, utilities burn coal to make electricity, despite the environmental problems it can cause. Why? According to Cambridge Energy Research Associates, it costs about half as much to generate electricity with Eastern coal as it does using plants powered by natural gas. And the large integrated steel mills, many of which are benefiting from higher global and local demand for steel, use coke—essentially baked coal—to fire their massive furnaces.

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The thirst for coal may be greater elsewhere in the world. China has an insatiable appetite for cheap electricity and for steel. (This chart shows how world coal consumption grew modestly but steadily over the course of the 1990s.) Demand on the part of China and other developing parts of the world has helped push up the prices of commodities such as oil, natural gas, and scrap metal for all buyers; the same thing is happening with coal.

But coal is one of the few areas where rising global demand for power and electricity plays to the United States' advantage. America may largely be a helpless victim of the continuing global rise in demand for crude oil, but when it comes to coal, we're more like Saudi Arabia. In 2001, the United States, according to this chart, produced more than one-quarter of the world's bituminous coal supply. And America is a swing supplier of coal to the rest of the world, which means that when demand is greater than anticipated, extra cash flows into our coffers. U.S. coal exports rose 11.6 percent in 2003.

The recent performance of the coal spot futures also seems to point to rising coal prices in the future. When the spot price stays high for long periods, the contract price tends to rise, as well. And this is having the effect of bringing greater investment into an industry that had been starved of capital—especially in the eastern part of the United States. Wilbur Ross, the New York investor who has become a big player in steel and textiles, has recently started investing in bankrupt coal-mining companies in Appalachia.

Investors like Ross and the companies that are plowing resources into Wyoming believe they can make money while contributing to American energy independence. "We have more Btus in coal than the Arabs have in oil," he said. Ultimately, that could turn out to be good news for the impoverished regions in coal-rich Kentucky and West Virginia.

The rise of the Sandy River barge future isn't all good news, though. If the higher spot prices lead to higher long-term contract prices, big users like utilities and steel-makers will either have to jack up the prices for their products or accept lower profits. And the increased reliance on coal for power could have negative environmental consequences. There are some signs, however, that utilities may finally be willing to make the investments in technology that will allow them to burn coal more cleanly. In late August, AEP, the large Midwestern utility, said it would build a giant $1.6 billion power plant that would turn coal into a gas that burns far cleaner than coal does and will slash mercury emissions by 95 percent.

It would be both ironic, and ultimately economically beneficial, if the next-generation fuel source turned out to be an environmentally friendly version of last generation's fuel source.

Thanks to Chris Briem of the University of Pittsburgh for his suggestion. Got an OEI? Send the idea to moneybox@slate.com. Gratitude, recognition, and a piece of Slate swag will be yours.