Arch Coal (ACI)

December 31, 2007, approximately 17 gigawatts of generating capacity was under construction or in advanced stages of development in the United States.

 

Coal is expected to remain the fuel of choice for domestic power generation through at least 2030, according to the EIA. Through that time, we expect new technologies intended to lower emissions of mercury, sulfur dioxide, nitrogen oxide and particulate matter will be introduced into the power generation industry. We believe these technological advancements will help coal retain its role as a key fuel for electric power generation well into the future.

 

The other major market for coal is the steel industry. Coal is essential for iron and steel production. According to the WCI, approximately 64% of all steel is produced from iron made in blast furnaces that use coal. The steel industry uses metallurgical coal, which is distinguishable from other types of coal because of its high carbon content, low expansion pressure, low sulfur content and various other chemical attributes. As such, the price offered by steel makers for metallurgical coal is generally higher than the price offered by power plants and industrial users for steam coal. Rapid economic expansion in China, India and other parts of southeast Asia has significantly increased the demand for steel in recent years.

 

Prices for oil and natural gas in the United States have reached record levels because of increasing demand and tensions regarding international supply. Historically high oil and gas prices and global energy security concerns have increased government and private sector interest in converting coal into liquid fuel, a process known as liquefaction. Liquid fuel produced from coal can be refined further to produce transportation fuels, such as low-sulfur diesel fuel, gasoline and other oil products, such as plastics and solvents. Several coal-to-liquids projects are in the process of development, including a coal-to-liquids facility proposed by a coal-conversion company in which we own an equity interest. We also expect advances in technologies designed to convert coal into electricity through coal gasification processes and to capture and sequester carbon dioxide emissions from electricity generation and other sources. These technologies have garnered greater attention in recent years due to developing concerns about the impact of carbon dioxide on the global climate. We believe the advancement of coal-conversion and other technologies represents a positive development for the long-term demand for coal.

 

U.S. Coal Production.  The United States produces approximately one-fifth of the world’s coal production and is the second largest coal producer in the world, exceeded only by China. Coal in the United States represents approximately 94% of the domestic fossil energy reserves with over 250 billion tons of recoverable coal, according to the U.S. Geological Survey. The U.S. Department of Energy estimates that current domestic recoverable coal reserves could supply enough electricity to satisfy domestic demand for more than 200 years. Coal production in the United States has increased from 434 million tons in 1960 to approximately 1.2 billion tons in 2007 based on information provided by EIA.

 

Western region—The western region includes, among other areas, the Powder River Basin and the Western Bituminous region. The Powder River Basin is located in northeastern Wyoming and southeastern Montana. Coal from this region has a very low sulfur content and a low heat value. The price of Powder River Basin coal is generally less than that of coal produced in other regions because Powder River Basin coal exists in greater abundance, is easier to mine and thus has a lower cost of production. In addition, Powder River Basin coal is generally lower in heat value, which requires some electric power generation facilities to blend it with higher Btu coal or retrofit some existing coal plants to accommodate lower Btu coal. The Western Bituminous region includes western Colorado, eastern Utah and southern Wyoming. Coal from this region typically has a low sulfur content and varies in heat value. According to the EIA, coal produced in the western United States increased from 408.3 million tons in 1994 to 618.3 million tons in 2007 as regulations limiting sulfur dioxide emissions have increased demand for low-sulfur coal over this period.

 

Appalachian region—The Appalachian region is divided into the north, central and southern Appalachian regions. Central Appalachia includes eastern Kentucky, Virginia and southern West Virginia. Coal mined from this region generally has a high heat value and low sulfur content. Northern Appalachia includes Maryland, Ohio, Pennsylvania and northern West Virginia. Coal from this region generally has a high heat value and a high sulfur content. According to the EIA, coal produced in the Appalachian region decreased from 445.4 million

tons in 1994 to 379.6 million tons in 2007, primarily as a result of the depletion of economically attractive reserves, permitting issues and increasing costs of production.

 

Interior region—The Illinois basin includes Illinois, Indiana and western Kentucky and is the major coal production center in the interior region of the United States. Coal from the Illinois basin varies in heat value and has high sulfur content. Despite its high sulfur content, coal from the Illinois basin can generally be used by some electric power generation facilities that have installed pollution control devices, such as scrubbers, to reduce emissions. We anticipate that Illinois basin coal will play an increasingly vital role in the U.S. energy markets in future periods. Other coal-producing states in the interior region include Arkansas, Kansas, Louisiana, Mississippi, Missouri, North Dakota, Oklahoma and Texas. According to the EIA, coal produced in the interior region decreased from 179.9 million tons in 1994 to 150.2 million tons in 2007.

 

U.S. Coal Exports and Imports.  Coal exports decreased from 71.4 million tons in 1994 to 58.6 million tons in 2007. As discussed above, as global consumption for coal has increased in recent years, countries such as China, Indonesia, South Africa and Russia have decided to retain a greater percentage of their coal production for domestic consumption. This development, together with port congestion in Australia, historically the largest coal exporter in the world, and a weak U.S. dollar, has caused U.S. coal to become more attractive in global markets. We expect this trend to continue as global coal consumption continues to increase.

 

Historically, coal imported from abroad has represented a negligible share of total U.S. coal consumption. According to the EIA, coal imports increased from 8.9 million tons in 1994 to 36.3 million tons in 2007. Coal is imported into the United States primarily from Colombia, Indonesia and Venezuela. Imported coal generally serves coastal states along the Gulf of Mexico, such as Alabama and Florida, and states along the eastern seaboard. We expect coal imports into the United States to decrease due to increasing demand in Europe.

 

 

 

Source: EIA

 

According to the National Mining Association, which we refer to
as the NMA, coal is the lowest-cost fossil fuel used in
producing electricity. We estimate that the cost of generating
electricity from coal is less than one-third of the cost of
generating electricity from other fuels. According to the EIA,
the average delivered cost of coal to electric power generators
during the first ten months of 2007 was $1.77 /mm Btus,
which was $6.39 /mm Btus less expensive than residual fuel
oil and $5.28 /mm Btus less expensive than natural gas.

 

The EIA projects that power plants will increase their demand
for coal as demand for electricity increases. The EIA estimates
that electricity demand will increase by at least 40% by 2030,
despite continuing efforts throughout the United States to
become more energy efficient. Coal consumption has generally
grown at the pace of electricity growth because coal-fueled
electricity generation is used in most cases to meet baseload
requirements. We estimate that coal consumption for power
generation increased approximately 1.7% in 2007 as a result of
average economic growth and more favorable weather than in 2006.
Historically, demand for electricity has generally grown in
proportion to U.S. economic growth, as measured by gross
domestic product. In 2007, real gross domestic product increased
2.2%, according to the U.S. Department of Commerce.

 

Demand for coal is broadly influenced by weather. Weather
patterns requiring greater use of air-conditioning or heating
translate into greater demand for coal-based electricity
generation. According to the EIA, coal stockpiles at power
plants represented an approximate
53-day
supply at the end of 2007, compared to coal stockpiles
representing an approximate
50-day
supply at the end of 2006. We believe that some domestic power
plants seek to protect against future supply disruptions by
maintaining higher stockpile levels.

 

We believe that demand growth from new coal-fueled power plants
represents an important element to the long-term outlook for
coal. We estimate that roughly 25 gigawatts of new domestic
coal-fueled electricity generation capacity is currently under
construction or in advanced permitting stages, equating to more
than 85 million tons of new incremental annual coal demand,
based on information obtained from the National Energy
Technology Laboratory, which we refer to as the NETL, and our
internal estimates. We expect all or a significant majority of
these plants to be built over the next five years. The NETL also
estimates that, at

December 31, 2007, approximately 17 gigawatts of generating
capacity was under construction or in advanced stages of
development in the United States.

 

Coal is expected to remain the fuel of choice for domestic power
generation through at least 2030, according to the EIA. Through
that time, we expect new technologies intended to lower
emissions of mercury, sulfur dioxide, nitrogen oxide and
particulate matter will be introduced into the power generation
industry. We believe these technological advancements will help
coal retain its role as a key fuel for electric power generation
well into the future.

 

The other major market for coal is the steel industry. Coal is
essential for iron and steel production. According to the WCI,
approximately 64% of all steel is produced from iron made in
blast furnaces that use coal. The steel industry uses
metallurgical coal, which is distinguishable from other types of
coal because of its high carbon content, low expansion pressure,
low sulfur content and various other chemical attributes. As
such, the price offered by steel makers for metallurgical coal
is generally higher than the price offered by power plants and
industrial users for steam coal. Rapid economic expansion in
China, India and other parts of southeast Asia has significantly
increased the demand for steel in recent years.

 

Prices for oil and natural gas in the United States have reached
record levels because of increasing demand and tensions
regarding international supply. Historically high oil and gas
prices and global energy security concerns have increased
government and private sector interest in converting coal into
liquid fuel, a process known as liquefaction. Liquid fuel
produced from coal can be refined further to produce
transportation fuels, such as low-sulfur diesel fuel, gasoline
and other oil products, such as plastics and solvents. Several
coal-to-liquids
projects are in the process of development, including a
coal-to-liquids
facility proposed by a
coal-conversion
company in which we own an equity interest. We also expect
advances in technologies designed to convert coal into
electricity through coal gasification processes and to capture
and sequester carbon dioxide emissions from electricity
generation and other sources. These technologies have garnered
greater attention in recent years due to developing concerns
about the impact of carbon dioxide on the global climate. We
believe the advancement of coal-conversion and other
technologies represents a positive development for the long-term
demand for coal.

 

U.S. Coal Production.  The United States
produces approximately one-fifth of the world’s coal
production and is the second largest coal producer in the world,
exceeded only by China. Coal in the United States represents
approximately 94% of the domestic fossil energy reserves with
over 250 billion tons of recoverable coal, according to the
U.S. Geological Survey. The U.S. Department of Energy
estimates that current domestic recoverable coal reserves could
supply enough electricity to satisfy domestic demand for more
than 200 years. Coal production in the United States has
increased from 434 million tons in 1960 to approximately
1.2 billion tons in 2007 based on information provided by
EIA.

 

Western region—The western region includes, among other
areas, the Powder River Basin and the Western Bituminous region.
The Powder River Basin is located in northeastern Wyoming and
southeastern Montana. Coal from this region has a very low
sulfur content and a low heat value. The price of Powder River
Basin coal is generally less than that of coal produced in other
regions because Powder River Basin coal exists in greater
abundance, is easier to mine and thus has a lower cost of
production. In addition, Powder River Basin coal is generally
lower in heat value, which requires some electric power
generation facilities to blend it with higher Btu coal or
retrofit some existing coal plants to accommodate lower Btu
coal. The Western Bituminous region includes western Colorado,
eastern Utah and southern Wyoming. Coal from this region
typically has a low sulfur content and varies in heat value.
According to the EIA, coal produced in the western United States
increased from 408.3 million tons in 1994 to
618.3 million tons in 2007 as regulations limiting sulfur
dioxide emissions have increased demand for low-sulfur coal over
this period.

 

Appalachian region—The Appalachian region is divided into
the north, central and southern Appalachian regions. Central
Appalachia includes eastern Kentucky, Virginia and southern West
Virginia. Coal mined from this region generally has a high heat
value and low sulfur content. Northern Appalachia includes
Maryland, Ohio, Pennsylvania and northern West Virginia. Coal
from this region generally has a high heat value and a high
sulfur content. According to the EIA, coal produced in the
Appalachian region decreased from 445.4 million

tons in 1994 to 379.6 million tons in 2007, primarily as a
result of the depletion of economically attractive reserves,
permitting issues and increasing costs of production.

 

Interior region—The Illinois basin includes Illinois,
Indiana and western Kentucky and is the major coal production
center in the interior region of the United States. Coal from
the Illinois basin varies in heat value and has high sulfur
content. Despite its high sulfur content, coal from the Illinois
basin can generally be used by some electric power generation
facilities that have installed pollution control devices, such
as scrubbers, to reduce emissions. We anticipate that Illinois
basin coal will play an increasingly vital role in the
U.S. energy markets in future periods. Other coal-producing
states in the interior region include Arkansas, Kansas,
Louisiana, Mississippi, Missouri, North Dakota, Oklahoma and
Texas. According to the EIA, coal produced in the interior
region decreased from 179.9 million tons in 1994 to
150.2 million tons in 2007.

 

U.S. Coal Exports and Imports.  Coal
exports decreased from 71.4 million tons in 1994 to
58.6 million tons in 2007. As discussed above, as global
consumption for coal has increased in recent years, countries
such as China, Indonesia, South Africa and Russia have decided
to retain a greater percentage of their coal production for
domestic consumption. This development, together with port
congestion in Australia, historically the largest coal exporter
in the world, and a weak U.S. dollar, has caused
U.S. coal to become more attractive in global markets. We
expect this trend to continue as global coal consumption
continues to increase.

 

Historically, coal imported from abroad has represented a
negligible share of total U.S. coal consumption. According
to the EIA, coal imports increased from 8.9 million tons in
1994 to 36.3 million tons in 2007. Coal is imported into
the United States primarily from Colombia, Indonesia and
Venezuela. Imported coal generally serves coastal states along
the Gulf of Mexico, such as Alabama and Florida, and states
along the eastern seaboard. We expect coal imports into the
United States to decrease due to increasing demand in Europe.