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Coal Industry Turning Up The Heat

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By RUSSELL RAY

The Tampa Tribune

Published: June 5, 2008

TAMPA - Coal mining has never been more lucrative.

The price of coal, a major ingredient in the production of electricity and steel, has doubled since January, pushing the stock prices and earnings of U.S. coal producers to new highs.

The reason: Steel makers in developing countries have increased production to record levels and disruptions in global coal production have created a coal market that is undersupplied.

In just five months, spot prices for U.S. coal have surged from about $55 a ton to more than $100. The booming international coal market means demand for U.S. coal may reach a record 1.22 billion tons this year.

Two Tampa companies, Walter Industries Inc. and TECO Energy Corp., are benefiting from the historical surge in coal prices. Both are major producers of metallurgical coal, which is used in steel production and is in high demand in countries such as India and China.

"The demand from India and China has affected the global supply of this product," said Victor Patrick, vice chairman and chief financial officer of Walter Industries.

As the price soars for metallurgical coal - a higher quality, hotter burning coal - other types that can be used to make steel are being sold in the higher-priced metallurgical coal market. As a result, prices for all types of coal have skyrocketed.

"Any coal anywhere that can be used as a met coal is being pulled into the met coal market," Patrick said. "The growth of the steel industry in China and Brazil has been enormous."

This week, coal industry analyst David Khani raised his 2009 price forecast for metallurgical coal to $250 a ton from $130 a ton. Although producers are ramping up production of metallurgical coal, supplies will remain tight through next year amid stronger-than-expected demand for steel, said the Friedman, Billings, Ramsey Group analyst.

This year, supply contracts at Walter Industries range from $135 a ton to more than $315 a ton, for an average of $209 a ton. That's up from an average of $101 a ton last year.

Although coal prices are expected to drop as producers replenish supplies, industry experts say the cost of coal will remain strong, citing rapid industrial growth in China, India and Brazil.

"These economies really are having an industrial revolution. It looks very similar to the one we had in the late 19th century," Patrick said.

Most coal supplies are sold under year-to-year contracts at set prices.

James Rollyson, a coal industry analyst for Raymond James & Associates in Houston, said contract prices next year may drop from this year's record highs, but prices will still be strong enough to generate big profit margins for producers and their investors.

Many coal producers "do not want to boost production too much to the extent that it starts to negatively impact pricing," Rollyson said. "We will see if that mentality changes any given the current pricing outlook."

Walter's stock price has surged above $90 a share from about $36 in January. About 98 percent of the company's coal production is shipped to steel producers overseas.

Last year, Walter Industries produced nearly 6 million tons of coal. The company has spent $175 million in the past four years on the expansion of existing coal mines and the acquisition of new reserves. As a result, the company expects to increase production by 50 percent, to 9 million tons, in 2010.

"We penciled it out to make money at $55 a ton," Patrick said of Walter's investment. "We've been very pleasantly surprised."

In addition to increased demand, flooding in Australia and a major earthquake in China have stalled coal shipments from those countries.

"That's pushing up prices worldwide, particularly for the higher quality metallurgical coal," said John Ramil, president and chief operating officer of TECO Energy.

TECO expects to produce 10 million tons of coal this year, but the prices TECO receives for those supplies are well below today's record highs.

"We're not getting the full effect of the higher prices," Ramil said.

That's because most coal is sold under one- to three-year contracts. TECO's existing contracts are based on 2006 and 2007 prices.

As those contracts expire this year, however, they will be renewed at today's lucrative prices. As a result, earnings from TECO's coal-mining business are expected to double next year, Ramil said. What's more, TECO's customers have expressed interest in signing longer term contracts.

Citigroup recently raised its rating on TECO's stock from "Hold" to "Buy" on prospects of increased earnings from the company's coal-mining business. The stock is trading at more than $20 a share and is up about 20 percent this year.

The increased demand from abroad is expected to be a boon for coal producers in the United States, which has 250 billion tons of recoverable coal, more than any country in the world. Those reserves have as much energy content as about 800 billion barrels of oil, well above the oil reserves of the Middle East, according to the National Mining Association.

The top coal-producing states, according to the association, are Wyoming, West Virginia, Kentucky, Pennsylvania and Texas.

Reporter Russell Ray can be reached at (813) 259-7870 or rray@tampatrib.com.

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