Economic analysis of the Virginia steam coal market

TR Number
Journal Title
Journal ISSN
Volume Title
Virginia Polytechnic Institute and State University

In recent years the Central Appalachian coal industry has suffered from a number of changes in the structure of the coal market. Foremost among these changes have been the collapse of the domestic steel industry and the passage of the Staggers Act. In the past high quality central Appalachian coal was sold mainly as premium coking coal. This market failed, and continues to shrink. Regional coal producers are now looking to the rising demand for steam coal in a nation which is turning away from oil and nuclear power generation. With the possible passage of the Clean Air Act, low sulfur central Appalachian coal may have a promising future, but only if its production can reach this new market.

Prior to 1980, regulated rail tariffs gave coal producers access to most consumers, while independent railroads competed for freight. Railroad deregulation greatly improved the position of the railroads, but weakened that of regional coal producers. Central Appalachia and the southern coastal states were left with only two railroads, CSX and NS. These railroads now set their own rates and secretly negotiate contracts with shippers. Due to the configuration of ownership of these tracks, the vast majority of mines and utility plants were left with access to only one carrier. In this situation rail transportation has become the primary concern. Mines unable to originate shipments on the same railroad which is serving the utility plant find themselves locked out of that market unless their mine price is sufficiently low enough to compensate for the increased rail rate. Most of the coal burning plants in Virginia are located on CSX, while the vast majority of southwest Virginia's coal production is served by NS. With a higher mining cost than in eastern Kentucky and southern West Virginia, Virginia producers are having great difficulty in competing in the state's steam coal market. This dissertation is the first effort to quantitatively specify the regional steam coal market. This is done by identifying sources of data which are subsequently used to generate short term forecasts of mine price. These forecasts are used in the cost vector of a Virginia coal Purchasing model which is solved to determine the optimal pattern of coal purchases for Virginia utilities. The structure of the model is based on a detailed market analysis which accounts for the influence of rail rates.