Boilers, Coal

National Mining Association Forecast: The Outlook for Coal in 2008

Production of coal will return to near record levels in 2008 reaching 1.160 billion tons, just 2 million tons shy of the record set in 2006 and 1.1 percent higher than the 1.147 million tons produced in 2007. Coal production is driven by the demand for affordable and reliable coal that electric generators will use to produce half the electricity expected to be used in the United States this year. There continues to be a strong interest in coal as a base load fuel, and the National Mining Association expects that over the long term coal production and use will frequently set annual records as coal is used not only for electricity but also finds new markets in the industrial, commercial and transportation sectors through gasification and liquefaction.

In 2008, U.S. coal production is expected to total 1.160 billion tons, 1.0 percent more than the 1.148 billion tons mined in 2007. Production in the East, including Appalachia, Illinois, Indiana and West Kentucky, will approximate 480 million tons, essentially unchanged from the 482 million tons produced last year. Production in the West, including the Powder River Basin, will total 680 million tons, up 2.1 percent from the 666 million tons mined in 2007. The increases in production will meet new demand for coal by utilities and for export. Production and transportation capacity to handle these levels of production are fully adequate.

Demand for U.S. coal for use within the United States and for export to Canada and overseas destinations, will reach 1.209 billion tons, 15 million tons, or 1.3 percent, more than the record demand of 1.194 billion tons set in 2007. Because inventories on a national basis are at adequate levels, there will be little demand in 2008 for coal for inventory build, putting coal supply (that includes production and imports) and demand in balance for the first time in several years.

Imports of coal, which have increased significantly this decade, remained level at 36.5 million tons in 2007and are not expected to change in 2008. Approximately 70 percent of the coal imported into the U.S. is from Columbia. Venezuela, Indonesia and Canada account for another 25 percent. There shares are expected to be approximately the same in 2008.

Almost 95 percent of the coal used in the United States is consumed for the purpose of generating electricity (this equates to approximately 93 percent of domestic production). In 2007, electric generators used 1.050 billion tons of coal to produce 50.1 percent of the electricity sold through the grid. Commercial and industrial consumers used another 27 million tons to generate electricity for their own use. Coal use for electricity generation was 2.9 percent higher than in 2006 due to higher overall demand for electricity caused in part by stronger than expected economic activity and in part by the warmer than normal fall. Overall, the demand for electricity increased by 2.9 percent in 2007 versus the 0.2 percent increase experienced in 2006.

In 2008, given more normal weather patterns and taking slower economic growth into account, electricity production is expected to increase in the 1.3 – 1.7 percent range. Should economic growth be lower than forecast (NMA is assuming a growth rate of just less than 2 percent), electricity demand could be lower than forecast.

Consumption of coal will increase at a lower rate in 2008, or by 0.7 percent to 1.157 billion tons, and coal’s share of the market will decline slightly to an even 50 percent. Coal generation, especially in the Western grid, is nearing a peak, and there is little potential for increase without new capacity. Two coal plants will come on line in 2008—the 90 MW Black Hills unit in Wyoming and the 203 MW unit begin built by Newmont Mining in Nevada. This follows the addition of three units in 2007: the Hardin Generator Project Unit 1 in Montana, the Springerville Unit 2 in Arizona and the Cross Unit 3 in Iowa.

Nuclear generation performed at top levels in 2007 and is expected to do the same in 2008. Nuclear generation should remain at 2006 – 2007 levels this year. There are no uprates expected, and 2008 is a year of refueling for many units. However, the return of Brown’s Ferry #1 to full operation will more than offset any reduction in production due to refueling. Generation with natural gas is expected to increase in 2008 as new generating capacity comes on line.

Demand for metallurgical coal for use at steel mills showed a small decline in 2007 as steel production declined slightly. Although steel production is expected to decline again in 2008, demand for metallurgical coal should increase by one-half million tons and is forecast to be 23.5 million tons. A new coke oven is coming on line in Ohio, and any decline in demand for coke, should there be a decline, will be met with a decline in imports.

Industrial coal use, led by an increase in coal use at cement plants and at new ethanol plants, will total 36.5 million tons, 4.3 percent above the 35 million tons used by industry in 2007.

Exports—the story for 2007—will remain strong into 2008. Last year, despite a decline in shipments of both metallurgical and steam coal to Canada, exports increased by 17 percent. Exports to overseas destinations totaled 40 million tons in 2007, 34.7 percent, or 10.3 million tons, more than in 2006. The U.S. coal export industry clearly benefited from increased demand, a weak dollar and production issues in other supplier countries. Strong world demand for coal persists. China has rapidly moved from a net exporter of both steam and metallurgical coal to a net importer. Production and logistical problems continue in many supplier countries, and the U.S. continues to benefit from a weak dollar. As a result, export of U.S. coal to overseas destinations is expected to increase again in 2008 – although at a slower rate. Metallurgical coal shipments to overseas destinations are expected to increase to 34 million tons (30 million in 2007), and steam coal shipments are expected to increase to 11 million tons (10 million in 2007). Thus total shipments of U.S. coal to overseas destinations is expected to be 45 million tons in 2008, 12.5 percent higher than shipments in 2007. There is an upside potential to this forecast, especially for high grade U.S. metallurgical coal, and exports could be more. Shipments of coal to Canada will return to more normal levels—15 million tons steam coal and 4 million tons of met coal.

Coal inventories, which increased sharply in 2006 after several years of decline, increased again in 2007, but at a lower rate. Inventory build totaled 8.2 million tons in 2007. Because electric utility inventories—on a national basis—are at or near desired levels, NMA does not expect demand for coal for inventory build this year. As a result coal demand for actual use and export will approximately equate with coal supply—or with coal production and imports.

The outlook for coal remains positive for 2008, despite our expectations for slower economic growth. In 2007, most analysts believe U.S. economic growth, as measured by real GDP, will approximate 2.2-2.3 percent. Economic growth was, however, stronger in the first three quarters than in the fourth quarter. At the time this forecast was prepared (late November 2007), most analysts were forecasting that year-on-year economic growth in 2008 would be in the range of 1.9 – 2.4 percent. These forecasts were completed before the release of 4th quarter 2007 data, which will certainly be affected by slower than expected spending over the holiday period as well as the continued financial pressures caused in part by the sub-prime mortgage crisis.

Economic growth in 2008 will continue to be affected by the same factors that caused a reduction in economic activity in the 4th quarter of last year, and the costs of energy, and now higher costs of food, will certainly put a damper on consumer spending. It remains to be seen whether the administration and the Congress can agree on a short-term stimulus package to push consumer spending to higher levels.

Globally, economic growth is expected to be lower in 2008 than in 2007. The Economics Intelligence Unit has forecast that globally economies will grow by 4.5 percent in 2008 as compared with an estimated economic growth of 5.1 percent in 2007. This growth is led by China, expected to grow its economy by 9.9 percent, and India, which has a projected growth rate of 7.7 percent. Forecasts for inflation (as measured by the Consumer Price Index) are in the 2.5-3.5 percent range, and forecasts for unemployment have increased to approximately 5 percent, although worker shortages will still exist in some industries, including mining.

The 2008 coal production and consumption forecast details are attached.

The Outlook for Copper in 2008

The market for copper is a global market, and the outlook for copper production in the United States must be considered in that context. Copper, as have all base metals and minerals, has benefited from global economic expansion. The strongest rate of growth continues to be in Brazil, Russia, India and China, offsetting 2007 declines in the U.S., Japan and in most of the European Union.

Taking into account forecasts made by The International Copper Study Group (ICSG), Merrill Lynch, the RBC Capital Markets group and other analysts, mine production should increase by at least 6 percent in 2008 reaching about 17 million metric tons. This follows an estimated 5.1 percent increase in mine production in 2007. Production of refined copper also increased by 4.4 percent on a global basis in 2007, and ISGS expects refined copper production to grow another 4.6 percent in 2008. Globally, use of copper increased by 5.2 percent, according to ICSG, led by strong growth in apparent copper use in China, Russia and India. The same sources cited above agree that global demand for refined copper will continue to increase in 2008 by nearly 6 percent on average. The rate of increase could be lower if global economic activity slows. The rapid rate of increase in both China and Russia is expected to begin to slow and most analysts expect that copper use in the United States will show a decline.

Globally, copper production is expected to be more in line with demand due to increases in production capacity—primarily outside the United States—and there could be a slight inventory build over the year (as opposed to the supply deficits experienced in 2005 and 2006).

Production of copper at the mine in the United States is expected to increase to 1.250 million metric tons in 2008, the highest level since 2001. Based on forecasts of the analysts cited herein, NMA believes that U.S. mine production will once again show a small increase this year, despite the continued decline in actual copper use.

The Outlook for Gold in 2008

The market for gold is also a global market. The price of gold continues to reach record highs, exceeding the $900 per ounce mark early this month (KITCO). Price increases are being driven by concerns over high energy prices and fears of inflation, global political unrest, continued weakness in the U.S. dollar and concerns over unstable financial conditions. The World Gold Council states that in addition to these relatively short-term factors, longer-term movements in the supply and demand fundamentals support the price increases. These fundamentals include gradual reduction in global mine output, continued strong growth in jewelry demand, desire on the part of investors to diversify their portfolios and the much easier access to gold for investment purposes.

Gold is historically used in the production of jewelry and as an investment holding. Although still representing more than 60 percent of the demand for gold, the rate of increase in jewelry demand is not as strong as in previous years, and demand for gold for investment has increased according to the World Gold Council (WGC), and the rate of increase is accelerating. According to the WGC, investment demand in the third quarter of 2007 was 96 percent higher than in the third quarter of 2006. Although that rate of increase is not expected to be sustained, it is expected that the increase in demand for investment in 2008 will outstrip the increase in demand for jewelry.

The Gold Fields Mineral Service (GFMS) Gold Survey estimated that world production of gold declined by just over 1 percent in 2007 with losses centered in South Africa and Peru. According to GMFS, mine output increased in Indonesia and China, which for the first time was the world’s largest gold producer. GMFS expects a 2 percent increase in production in the first half of 2008. GMFS is also forecasting a slight decline in official sector sales during the first half of 2008.

In the U.S., the U.S. Geological Survey estimates show that gold production totaled 248,000 kilograms in 2006. Given data through September, gold production in 2007 should be at the same level. Production in the U.S. in 2008 will be flat with some small upside potential.