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1990-1999 The 1990s: Market Shifts Bring About Massive Consolidation 1990-1999 B uilding on the momentum of a fourth consecutive year of record coal produc- tion, the U.S. coal industry mined 1.029 bil- lion tons in 1990, a 56 million ton increase over 1989. Most of the increase in coal pro- duction occurred east of the Mississippi, where coal production reached a record lev- el of 635 million tons, 36 million tons more than the previous year. The West set a record as well with 401 million tons, a 20 million ton increase. The impending implementations of the Clean Air Act Amendments of 1990 (CAAA) and utility deregulation have already created a shift in coal demand and production. Wyoming mines were ramping up production and by 1992, coal production totaled 190 million tons per year (tpy). Wyoming has been the leading coal producing state for five consecutive years, and Powder River Basin (PRB) coal has energized this climb. Coal prices continue to decline. Electric utilities paid on average $28.60/ton of coal in 1993, which was down from $29.36/ton in 1992. Since 1985, when utility coal averaged $34.53/ton, prices have pretty much edged downward every year. Coking coal prices, which averaged $54.30/ton in 1985, now stand at $47.44. By the Autumn of 1994, the electric power industry is undergoing major structural changes initiated by retail wheeling in California that is reshaping traditional roles, creating opportunities for new participants, and redefining the scope and character of government regu- lations. Emerging from these changes is a less-tightly integrated, more diversified and above all, more competitive industry. Coal suppliers will come under growing pressure to renegotiate contracts. Utilities with long-term contracts above prevailing prices will be under strong economic pressure to either buy-down or write-down the uneconomic portion of those contracts. The transition costs are 156 www.coalage.com 100th Anniversary Special Issue referred to as "stranded investments." The experience of the North American gas industry in the 1980s serves as a sobering reminder. By mid-1995, the ILB begins to shrink. Typically, the ILB produced 130 million tpy (60 million tpy in Illinois, 40 million tpy in western Kentucky, and 30 million tpy in Indiana). Between the CAAA of 1990 and the UMWA-BCOA strike of 1993, the region took a significant hit. Nearly 13 million tons of western coal and 7 million tons of eastern coal moved into the ILB, while utility purchases as a whole declined by 2 million tons. The ILB lost 22 million tons before Phase I arrives. Mergers and acquisitions among coal transporters create economies of scale, eliminating multi-line hauls and over- head, and extending the reach for coal transporters. Some of the rail M&A; activity includes: Atchison Topeka Santa-Fe- Burlington Northern, Denver Rio Grande Western-Southern Pacific, and Union Pacific-Chicago & North Western. Eventually, the U.S. has two rail carriers, Burlington Northern-Santa Fe (BNSF) and Union Pacific (UP) moving coal east. They begin to experience delays moving mas- sive amounts of coal from one small loca- tion in the West, Campbell County, Wyoming, and it's only going to get worse. By 1996, PRB production is expected to grow to 320 million tpy by 2000 and 360 mil- lion tpy by 2005. PRB production increases since 1990 have been startling—growing from 200 million tpy to 285 million tpy by 1995. Even more surprising is that 40 million tpy of new production can be attributed to expanded output at three mines: Powder River Coal's North Antelope and Rochelle mines, and Kerr McGee's Jacobs Ranch operation. Several other mines in the area also increased production by 3 million to 8 million tpy. Analysts report that, contrary to the belief, environmental compliance is not the only factor driving PRB demand, price is a factor too. Utilities have found that the der- ate for burning an 8,800 Btu/lb coal was eas- ily overcome by its pricing. Toward the end of the decade, coal futures contracts are being developed for possible listing on the New York Mercantile Exchange (NYMEX). NYMEX has established a strong track record with futures and options contracts for other energy commodities including crude oil, refined petroleum products, natural gas and electric power. The planned intro- *Coal Age, October 1997 August 2012