ENERGY Rising demand for coal lights fire under industry

Stock prices of coal companies are rising as supply dwindles.
ASSOCIATED PRESS
The coal industry is on fire.
With supplies tightening and demand rising, mining companies are commanding higher prices for the fuel and investors are rewarding them lavishly.
Massey Energy Co.'s stock price has more than doubled in the past year, while shares of Consol Energy Inc., Arch Coal Inc. and Peabody Energy Corp. have soared 50 percent or more.
The last time coal prices were at today's levels was 2001, when stockpiles dwindled as power producers sought an alternative to expensive natural gas. But those good times proved to be short-lived as coal producers boosted spending right before the economy slowed and natural gas prices plummeted.
"In '01 people got burned by expanding too quickly," said James Gardiner, executive vice president and chief administrative officer at Massey Energy of Richmond, Va.
Analysts are bullish
While the industry once again might be experiencing a short-term boom, many officials and analysts believe coal producers are at the start of a period of prolonged prosperity -- albeit one that won't begin in earnest until 2005, when supply contracts signed this year begin to pay off.
"I believe we're on the verge of a major resurgence," Jack Gerard, president of the National Mining Association's said this month at the West Virginia Coal Association's annual meeting, held in Charleston.
Wall Street is upbeat about several trends, the most significant of which is steadily declining productivity from aging Appalachian mines, resulting in two consecutive years of lower nationwide output despite growth in the West.
The domestic shortfall -- magnified by a handful of bankruptcies by Eastern coal companies since 2001 -- has been offset through imports, and no shortages are forseen. But analysts predict that over time supplies will tighten, leading to higher and more volatile prices.
"In our view the long-term supply and demand outlook for the U.S. coal producers continues to improve," Credit Suisse First Boston analyst David Gagliano said in a recent report.
In 2003, U.S. coal production declined 1.9 percent (4.4 percent in the Appalachia region), according to Energy Department statistics. Credit Suisse First Boston estimated that demand grew 2 percent to 3 percent last year.
With nuclear plants nearing output limits and natural gas prices soaring, analysts believe coal will become an even more important fuel to electric utilities. More than half the nation's electricity already comes from coal and demand is expected to increase as the economy improves.
Bush administration
The outlook for coal also benefits, analysts said, from the Bush administration's industry-friendly positions on issues ranging from power plant pollution to controversial mining techniques.
The spot price for Central Appalachian coal averaged $41.50 per short ton for the week ended Jan. 16, which was 33 percent above last year's level, according to the Energy Department. Coal mined in Wyoming's Powder River Basin averaged $6.75 per short ton, a 9 percent increase from a year ago.
Because most coal is purchased through long-term contracts, today's higher spot prices have little immediate impact. But they do give producers leverage during contract negotiations.
In the meantime, Batson said, coal purchasers are hedging their positions.
Those who think the price spike is temporary are drawing down inventories of coal purchased when prices were lower, Batson said. Those worried about supplies are signing multi-year contracts.
Other factors that could undermine bullish forecasts include a slower-than-expected economic recovery, lower natural gas prices and moderate weather, which reduces demand for home heating and air conditioning.
"We could have a big sap in demand for power and, boy, I'll tell you, that would wipe out the [coal] supply deficits real quick," said Mark Morey, a director at Cambridge Energy Research Associates in Washington.
Morey believes it is "too early to tell" if the industry is at the start of a new era of rising wealth, but he said a compelling story can be told in support of that view.
For starters, major coal companies are more disciplined about production because they have grasped a simple truth the oil and gas sectors have known for years: Supplying the market with more than it needs depresses prices and ultimately is bad for the bottom line. Morey chalked up the supply glut that was created in 2001 as an aberration amplified by the severity of the economic downturn.
In the past decade producers have focused more on squeezing out everything they can get from older mines than spending large amounts of money to develop new ones. "It's a quicker way to grab market share and it's also lower risk," Morey said.