Aided by exports, a revival in Illinois coalfields

2012-09-30T00:15:00Z 2012-10-07T22:22:30Z Aided by exports, a revival in Illinois coalfieldsBY JEFFREY TOMICH • jtomich@post-dispatch.com > 314-340-8320 stltoday.com

From mothballed power plants to shuttered coal mines to sinking stock prices, King Coal’s struggles have become increasingly obvious this year.

But an entirely different story is emerging across southern Illinois, where the mining industry is holding a revival after two decades of decline.

While miners elsewhere are trying to dig out of the worst industry slump in decades, production from Illinois rose 13 percent last year. Output surged an additional 19 percent through the end of August, a pace no other state in the country can match. In fact, with the exception of Colorado, every other major coal-producing state is producing less this year, including Wyoming and West Virginia.

The current trend puts Illinois on track to produce more than 40 million tons of coal for the first time since the state's mining industry was decimated in the mid-1990s. Mining employment has jumped, too, adding more than 800 jobs over the past year, bringing total employment above 4,400.

Coal produced in Illinois has historically gone to local power plants and factories or been shipped to domestic utilities. But with one notable exception -- the giant Prairie State power plant in southwest Illinois, which is fed by the adjacent Lively Grove mine -- the new Illinois coal rush is shipping overseas.

"Of that 13 percent increase, I would say most of that went out of the country," said Phil Gonet, head of the Illinois Coal Association, an industry group based in Springfield.

The ongoing expansion of U.S. coal exports began about five years ago, as international coal prices began to rise in response to China’s ravenous demand for energy.

"All of the coal companies -- it doesn’t matter what part of the country -- started chasing that market because they could get a higher price overseas than they could get domestically," said John Hanou, a coal industry consultant in Annapolis, Md.

The rise in international coal shipments has coincided with a downturn in domestic coal use as cheap natural gas and tougher environmental regulations are steering utilities to cleaner fuels and a slow economic recovery and energy efficiency improvements limit overall electricity demand.

The volume of Illinois coal shipped overseas almost tripled last year to 7 million tons, or almost 20 percent of what miners dug out of the ground, compared with 2.5 million tons in 2010, according to a report by the Illinois Department of Commerce and Economic Opportunity.

Coal industry analysts and executives believe exports could top 10 million tons this year. But they caution that forecasting international coal sales is risky because much of the data is proprietary.

Still, this will be a record year for Illinois and the rest of the coal producing region known as the Illinois Basin, an area that includes parts of western Kentucky and southern Indiana, Hanou said.

DESTINATION EUROPE

There’s little available data to show exactly where Illinois coal is being shipped. Some may going to Asia, some to South America. But analysts and coal executives say most of what leaves on barges ends is headed to Europe, which still burns about 1 billion tons of the black rock each year.

Deck Slone, a senior vice president at Creve Coeur-based Arch Coal Inc., called coal “very economic” in Europe right now. Unlike in the U.S., where a glut of relatively inexpensive natural gas is prompting utilities to switch away from coal, the opposite is occurring on the other side of the Atlantic. There, natural gas is about three times as expensive and power generators continue to lean on coal despite efforts to curb carbon emissions.

Coal from the Illinois Basin is competitive in Europe right now because of its high energy content and relatively low cost of production compared with U.S. coal producing regions such as Appalachia, where most of the easy-to-get coal has already been mined. So even though it has to travel extra miles by barge and ship, it’s still cost effective, analysts say.

Bill Hoback, a former miner and head of the state’s Office of Coal Development, said the state recognized the international opportunity a few years ago, and made a trip in 2009 to help local mining companies tap into the market.

Among their stops was a coal industry conference in France. The group included an engineer to help utility buyers understand how Illinois coal, generally high in sulfur and chlorine, would react in power plant boilers. They set up a table in the lobby of Le Meridian Hotel in Nice, on the Mediterranean coast and met with representatives from a number of European power plants.

Hoback was on the trip and is convinced it paid big dividends by helping put Illinois on the radar, particularly for smaller mining companies that don’t have international marketing offices.

”It was a huge opportunity,” Hoback said. “I think it’s what helped to open those markets up.”

EXPANSION MODE

Coal industry officials say the new coal boom is paying big economic dividends for parts of downstate Illinois that desperately need a jolt in the form of in hundreds of new mining jobs and related economic activity.

The expansion is also generating increased concern among environmental groups and some landowners about the effects of mining on nearby farmland and water resources. There's also the greenhouse gas emissions of burning coal, no matter whether it’s in state or halfway around the world.

Nevertheless, the Illinois coal industry continues to eye expansion.

Illinois has 38 billion tons of recoverable coal -- the third largest reserves in the nation after Montana and Wyoming.

"And when you look at the map," Hoback said, "we’ve just scratched the surface."

Analysts and state officials estimate that Illinois coal production could top 50 million tons in two years and soon after could reach 60 million tons. That would return the Illinois coal industry back to levels not seen since the early 1990s when the Clean Air Act Amendments prompted some utilities to walk away and buy western coal, which has a lower sulfur content.

In fact, a number of new mines represent at least 20 million tons of additional production capacity now being developed.

Among the companies adding capacity include Peabody Energy Corp., the nation’s largest coal producer, which is expanding its existing Gateway Mine in Randolph County by 40 percent to 4.5 million tons.

Privately held White Oak Resources LLC is investing $400 million in a new mine near McLeansboro in Hamilton County that’s expected to produce as much as 6.5 million tons of coal a year.

And no company has been more ambitious than Foresight Energy LLC. Based in downtown St. Louis, the secretive company controlled by mining mogul Chris Cline, owns 3 billion tons of Illinois coal reserves and is in the midst of a $1.6 billion plan to build out four mine complexes in the state.

Even coal industry giants that don’t yet have a big presence in Illinois see potential for additional exports.

Arch Coal, for instance, operates just one mine in the state near Springfield, which mainly sells coal to a nearby power plant. But the company controls more than 700 million tons of reserves in the Illinois Basin, and it is in process of permitting a new mine in northern Perry County.

Arch Coal sees some potential for additional domestic sales from the Illinois Basin in coming years, Slone said. But “we think the larger driver will be those tons moving into the export market.”

Peabody and Foresight, both of which are based in downtown St. Louis, are also eyeing export opportunities.

Peabody this summer inked agreements to expand access to export terminals in Texas and Louisiana over the next decade, giving the company the ability to ship millions of additional tons from mines in the West or Midwest.

And last summer Foresight purchased a Mississippi River coal terminal near New Orleans, and plans to increase shipping capacity from about 5 million tons a year to 8 million or 16 million, according to a Securities and Exchange Commission filing.

FUTURE POTENTIAL

The fickleness of global energy markets makes it difficult to predict how fast demand for Illinois coal will grow -- or whether it will grow at all. That’s particularly true because international sales are generally short-term deals. But that isn't stopping coal industry from pursuing opportunities to sell into faster-growing markets in India and China, especially when expansion of the Panama Canal is complete.

In fact, Illinois has commissioned a study, due later this fall, to help the state's coal industry better compete in the global market.

"Our goal when we asked to have that study done is to look out five to 10 years and figure out how are these markets going to be shifting around," Hoback said.

Meanwhile, Gonet of the state coal association, said the fact that some of the industry's biggest companies are making huge investments in the state gives him confidence the markets will be there.

"You don’t spend $250 million to build a mine if you don’t have any idea where the coal is going to go," he said.

Read more from Jeffrey Tomich, who covers energy and the environment for the Post-Dispatch. Follow him on Twitter @jefftomich and the Business section @postdispatchbiz.

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