As discussed earlier, Illinois Basin (or ILB) coal has a price advantage over the Central Appalachian region. The ILB has lower mining costs. Also, ILB coal has higher sulfur content. The majority of the coal-fired power plants have installed scrubbers. As a result, higher sulfur coal is acceptable. ILB coal is in higher demand compared to Appalachian coal. Appalachian coal is more expensive—even after adjusting for heat rate.
Railroads connect the ILB to the Midwest and to Gulf Coast through the Ohio and Mississippi Rivers. Major railroad operators in the region include CSX Corp. (CSX) and Norfolk Southern (NSC). In recent years, the ILB’s share in U.S. coal exports increased. ILB coal has been competitive on the cost front compared to Appalachian coal. In the past, Appalachian coal accounted for most of the U.S. coal exports.
The U.S. Energy Information Administration (or EIA) expects ILB production to continue to grow until 2040. Appalachian production is expected to fall. An increase in ILB coal exports is positive for Hallador Energy (HNRG) and Peabody Energy (BTU). Both of these companies have a presence in the ILB, but not in Appalachian.
While the ILB is better off than Appalachian, it isn’t immune to changes in the U.S. coal industry. The shale gas boom and the U.S. Environmental Protection Agency’s (or EPA) war on coal have eroded coal’s market share in electricity generation. It’s expected to fall in the future as more coal-fired power plants retire. Most of these retirements are expected to happen east of Mississippi—where almost all ILB coal consumers are located. The EPA projects a decent future for ILB coal. However, any substantial drop in natural gas prices or new regulations could change the ILB’s prospects.
Also, transporting high sulfur coal over long distances adds to pollution. Since the EPA waged a war on coal, it probably won’t allow ILB coal to be transported to other parts of the U.S.—even if it makes economic sense. Sulfur can be removed by coal washing, but it would add to the cost. Powder River Basin (or PRB) coal is much cheaper than ILB coal. This blocks the ILB’s passage west of Mississippi. This will confine the ILB coal’s use to the Midwest.
China (FXI) recently banned high sulfur coal imports. This was an attempt to reduce pollution. As a result, ILB coal may not be able to reach China. If the war against coal spreads to other countries, ILB coal will be at a disadvantage compared to its competitors. It’s would be at a disadvantage because of its high sulfur content.
In the next part of the series, we’ll discuss each of the major coal producing regions’ statuses.
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Peabody (BTU) is the largest reserve holder. It's the second largest producer in the ILB. It shipped 30 million tons in 2013. The company runs three underground mines and five surface mines in the region. BTU's coal is shipped to utilities in the region. It's also exported to Europe through the Gulf Coast.
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