Underground tunnel in the coal mine

Source: ZE

Central Appalachia (CAPP) was once the heart of coal mining in the United States. At its peak, the area was the dominant source of coal in the United States, producing 294 million tonnes of coal per year (Downstream Strategies). But in recent years, coal production from Central Appalachian mines has fallen drastically from 291 million tonnes in 1997 to 185 million tonnes in 2011 and is projected to fall to 128 million tonnes by 2020 (Downstream Strategies).

As a reflection of the waning state of coal in the region, Argus dropped six of its assessments on Central Appalachian coal effective October 4, 2013, as reported in ZE’s DataWatch article.

According to the report by Downstream Strategies entitled “The Continuing Decline in Demand for Central Appalachian Coal,” regulatory challenges are often blamed for the decline of CAPP coal, but the problem is multifaceted and can also be attributed to other factors such as rising Appalachian coal prices and increasing competition from other coal basins and natural gas. (To learn more about carbon regulations, see our blog, A Farewell to Coal Power in the United States?)

CAPP coal prices are now among the highest in all of the United States largely due to decreased labour productivity. The number of labourers has increased steadily since 2001 amidst falling output levels as productive coal seams were exhausted and mining corporations dug deeper into hard-to-reach coal caches (Downstream Strategies).

CAPP Productivity

Figure 1: Central Appalachian Coal Prices and Labour Productivity. Source: Downstream Strategies

While CAPP prices rise, demand for coal is shifting to cheaper sources from competing Northern Appalachian, Powder River, and Eastern Interior basins (Downstream Strategies). As Platts reports, Southern Company is announcing the reduction of its CAPP coal purchases to 1% of its expected receipts, and converting to Illinois and Powder River Basin coal. Likewise, Tennessee Valley Authority is significantly reducing its consumption of CAPP coal and switching to other basins primarily due to cost (Platts). As seen in Figure 2 below, the price of Central Appalachian coal is the highest amongst competing coal basins in the United States. It has remained this way since 2007 excluding a brief period between 2008 and 2009.

CAPP vs Other Basins

Figure 2: Coal Prices for Central Appalachia and Competing Basins. | Data Source: EIA

Compounding the difficulties faced by Central Appalachia is the added struggle of competing with natural gas. Developments in shale gas resources and record-low natural gas prices have spurred a shift in electricity generation away from coal. The percentage of natural gas used in total electricity generation in the Appalachian region nearly doubled from 10% in 2006 to almost 20% in 2011 (Downstream Strategies), a time period during which coal and natural gas prices began to diverge (see Figure 2 below).

CAPP vs Natural Gas Prices

Figure 3: Central Appalachian Coal and Henry Hub Natural Gas Prompt Prices. | Data Source: NYMEX

In Figure 3, the prompt price for Central Appalachian Coal (CAPP) is plotted against that of Henry Hub Natural gas as published by NYMEX. As seen above, since 2009, the coal and natural gas prices have switched direction of their movement and the gap between them has been increasing.

The factors influencing the demand of CAPP coal are numerous and changing. The ZEMA Suite helps traders, investors, and industry participants keep up-to-date on movements in the coal and natural gas industries. To learn how ZEMA can help your company stay in the loop, contact us for a free demonstration.