Coal prices on rise, as utility stockpiles fall

By Steve James

NEW YORK, Sept 6 (Reuters) - Coal prices are expected to rise this year and next as a result of decreasing power plant stockpiles and strategic production cuts, two major U.S. coal producers said on Thursday.

"We suffered through 2006 and part of this year with an overhang of stockpiles, but it is whittling down," Arch Coal (ACI.N) Chief Executive Officer Steven Leer told an energy conference.

"Demand is up and supply is trending down, so now the trend lines are progressing towards crossing," he said.

Earlier, Gregory Boyce, president and chief executive of Peabody Energy (BTU.N) said prices were up significantly everywhere, for both steam coal and metallurgical, or coking coal, which is used for steel production.

"In the U.S. market the improvement this year will continue to accelerate," he told the Lehman Brothers conference.

"Production cuts and an increase in demand have put the market in balance," he said, noting that coal from the Powder River Basin (PRB) in Montana and Wyoming is now selling at prices 25 percent higher than a year ago.

According to the coal industry newsletter Coal & Energy Price Report, a ton of eastern U.S. coal from Appalachia was selling on Thursday for $44.25 -- up from $43.96 a month ago and $40.75 in March. PRB coal was selling for $11.00 per ton, up from $10.90 in August and $8.45 six months ago.

Last year, with stockpiles of coal at power plants relatively high and too much coal on the market, major producers cut back on production, especially in the Appalachian coalfields.

Boyce and Leer said that strategy, combined with utilities tending to keep higher stockpiles, was paying off with higher prices.

"Production is down 2.1 percent this year and met (coking coal) markets are starting to get hot," said Leer. "We also see an increase in steam exports."

He said utility stockpiles at the end of August were approximately for 44 days of coal -- within the range of the 5-year average.

"We feel very robust; the timing is good," he said of the conditions for a rise in coal prices.

Boyce said stockpiles were 11 percent down in the last two months, while more utilities were carrying higher inventories after transportation problems two years had inventories dangerously low.

"We see a significant expansion of coal markets," he said, citing economic growth driven by strong demand from China and India as well as the steel industry.

"The market dynamics are very promising for coal," he said.