18 October 2006 — Fundamentals for the U.S. coal industry will continue to be positive into 2007 as market conditions forge a stable contract pricing environment, according to a Fitch Ratings report.
Demand for coal, particularly from power generators, will continue to be robust in the medium term. Transportation bottlenecks and outages, the availability of labor and equipment, a challenging regulatory environment, and geology will all constrain supply growth, underpinning the price environment for coal. In the very near term, high-cost production should be taken off-line given softness in the spot market.
Mild winter weather, solid deliveries, and maintenance shutdowns at power generators allowed inventories to build, resulting in a decline in steam coal spot prices during the first nine months of the year. Natural gas prices also drifted lower from post-hurricane spikes and are approaching the point where some older, less efficient coal-fueled plants become uncompetitive.
Fitch expects steam coal realization growth to continue, but at a more moderate pace as more contract prices reflect the strength that emerged in 2004 and 2005. Contract pricing may flatten out beginning in 2008 in advance of new coal-fired power generation expected after 2010.
Earnings growth will be somewhat constrained by rising costs, given tight labor markets, high energy-related raw material and steel prices, and short supply of equipment and parts. Fitch expects costs acceleration to moderate.
The full ‘U.S. Coal Producers Update’ is available at www.fitchratings.com. Financial data for the major coal companies is provided as well as additional analysis of key industry trends, including recent regulatory updates.