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Illinois basin coal taking market share from central appalachia

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JIM ROSS / The State Journal JIM ROSS / The State Journal
JIM ROSS / The State Journal JIM ROSS / The State Journal

While many people have been looking at the Powder River Basin in Wyoming as the main competitor for coal from Central Appalachia, coal from another region has been moving in and taking market share.

"About two years ago, three years ago, 2010, about 12 percent of our coal originations on CSX were coming out of the Illinois Basin, and this most recent quarter about 28 percent," Clarence W. Gooden, executive vice president of CSX, said last week during a conference call with financial analysts. "And most of that coal has displaced Central Appalachian coal, which is down fairly significantly. So we see the Illinois Basin continuing to grow over time." 

When asked if that percentage has maxed out or will go higher, Gooden replied, "It's going to go a lot higher than that."

Norfolk Southern reported a similar trend. In a similar conference call this week, Don Seale, Norfolk Southern's chief marketing officer, said he expects the railroad to begin hauling more coal out of the Illinois Basin to coal-burning power plants in the South.

It's a combination of several market forces at work. 

Coal from Central Appalachia is more expensive, but it's lower in sulfur. On the other hand, with coal-burning power plants adding scrubbers, they can burn cheaper, dirtier coal and still meet regulatory requirements for smokestack emissions.

The Central Appalachia region includes southern West Virginia and Eastern Kentucky. Coal production is down significantly in both areas in the past 52 weeks, according to data compiled by the Energy Information Administration. Meanwhile, production in the Illinois Basin, which includes most of Illinois and parts of Indiana and western Kentucky, is up.

The problems in Central Appalachia have been discussed often. 

Among them is the fact that the larger, more accessible seams have been mined out, forcing producers to spend more to mine lower-profit seams.

At least one large producer in Illinois sees continued growth there.

"U.S. coal generation is up significantly to date, and natural gas generation has declined sharply. We expect coal use from the Powder River and Illinois basins to continue to increase, led by higher coal plant utilization and basin switching," Beth Sutton, vice president of communications and community relations for the American operations of Peabody Energy, said. "We see the two basins expanding some 25 percent over the next five years." 

In its quarterly earnings release issued July 23, Peabody Energy stated, "Longer term, Peabody expects U.S. coal consumption of Powder River Basin and Illinois Basin coal to continue to increase, led by higher coal plant utilization and basin switching."

The market shift comes as power plants begin to reduce their stockpiles. Plants cut back their coal use last year because of mild weather and low natural gas prices. As weather returns to a more normal pattern and gas prices rise, power plants are burning more coal.

"It's a story of two different market segments," Seale told analysts. "In the North, we're seeing stockpiles normalize. In the South, we're still seeing stockpiles above normal.

"We're seeing heavier gas competition in the South as well. But with the summer burn that we are seeing, we're seeing stockpiles begin to come down in the South, and they're at the normal level in the North."

In his company's conference call last week, CSX CEO, Michael J. Ward said, "Well, 2015, which I guess is two years from now, I think coal now as we said earlier is stabilized on a sequential basis. 

"I think as utility stockpiles draw down in the South, you can see some growth occurring over that period of time, and I think it's just too soon to assess what any further EPA regulations be, because they will certainly have court considerations in those."