News
26/10/13
High diesel prices weigh on US coal producers
New York, 13 October (Argus) — High diesel prices stemming from the US-Iran war
are increasing costs for US coal production and transportation, potentially
boosting prices and curbing available supply into 2027, according to producers
and buyers. Diesel is a major operating expense for surface mines, and it is
also factored into rail, barge and truck fuel surcharges. Rising costs first
started worrying some coal market participants when prices rose sharply in March
at the outset of the US-Iran war , and that concern has only grown with the war
in its eighth month with no end in sight. US retail diesel price hit an all-time
high in the week ended 21 September, averaging $6.529/USG, according to US
Energy Information Administration (EIA) data. While retail prices fell to
$6.199/USG in the week ended 5 October, that was still $2.30/USG higher than the
weekly average before the start of the US-Iran war and 53pc above values in the
first weeks of October in 2021-25. Producer margins under pressure High diesel
prices are having the biggest effect on Powder River basin (PRB) and Central
Appalachian coal mines. Surface mines are particularly exposed because diesel
fuels large-haul trucks, loaders and other mobile equipment. Producers that did
not fully hedge their fuel consumption have had little protection from the sharp
increase, one coal producer said. Midwest miners who had to buy fuel not under
contract would have paid an average $6.286/USG in the week ended on 5 October,
while those in the Rocky Mountains would have paid $6.276/USG, EIA data show. A
year earlier, average prices were were $3.67/USG in the Midwest and $3.671/USG
in the Rocky Mountains. "Higher production costs will drive up the floor price
that producers are likely to demand," another market participant said. But many
producers cannot fully offset operating cost increases in the short term, at
least partly because a majority of coal currently being produced is being
supplied under contracts that predate the spike in diesel prices. Operators also
have limited ability to reduce diesel consumption without cutting equipment use
or production. The effect may be most consequential among producers operating
near break-even levels. The two largest PRB producers, Peabody Energy and Core
Natural Resources, reported negative PRB cash margins in the second quarter.
Peabody's PRB segment recorded a $7.1mn loss in adjusted earnings before
interest, tax, depreciation and amortization, while Core Natural reported a
$5.8mn adjusted loss from its PRB operations. In Central Appalachia, mining
costs had already trended higher for the several years because of thinning
mining seams and higher labor costs. Added cost pressures from diesel prices
since March have further amplified profit-margin pressures, according to
producers in the basin. Going into 2026, producers indicated that costs to
produce Central Appalachian coal at a surface mine, load the product onto trucks
and transport it to railroads totalled $80-$90/short ton (st). Sources say those
costs have increased since the start of the war by least $6-8/st, with much of
the additional expense linked directly to surging diesel prices. Elevated fuel
costs may prompt some US miners to scale back output as soon as next year, a few
producers told Argus. To protect their margins, US coal producers may also seek
higher prices or push for adding fuel-related adjustments to contracts. Fuel
adjustments are already common in Central Appalachian term agreements to account
for at least some of the costs related to shifts in diesel prices, but the
number of utilities willing to enter these longer-term commitments have faltered
in recent years, and many rely more on purchasing coal from the basin on a spot
basis. Still, buyers facing escalating rail surcharges may resist paying more
for the coal itself. Sustained increases could affect the relative economics of
coal-fired power generation, particularly at plants receiving coal over long
rail distances or competing against natural gas generation. Transportation costs
climb with lag Fuel surcharge pricing mechanisms differ by transportation
company and contract. Many railroads use a monthly average diesel price from one
or two months earlier, meaning that the September spike will continue flowing
into freight costs even after weekly prices retreat. This could influence some
coal producers' interest in exporting coal, since producers pay the cost of
shipping coal to export terminals. But the greater effect on the US coal
industry might be on domestic buyers. Some US power plant operators, which pay
for transportation to their facilities, have not yet adjusted coal consumption
and purchasing plans because of high diesel costs, but they monitor diesel
prices closely. The monthly average on-highway diesel fuel price for August,
which some railroads apply to fuel surcharges on contracted October coal
shipments, increased to $5.462/USG from $3.744/USG a year earlier, according to
EIA. This raised Union Pacific's surcharge for southern PRB coal trains shipped
this month to around 70¢/mile from the 41¢/mile charge applied to shipments in
October last year, equivalent to about $2.58/st increase on PRB coal shipped to
the St. Louis region, according to Argus calculations. With diesel prices rising
further in September, the average fuel surcharge for PRB coal shipments in
November will climb to 84¢/mile. Among eastern US rail carriers, CSX's surcharge
for October deliveries nearly doubled to 87¢/mile from 44¢/mile a year earlier,
and the surcharge will rise further to $1.07/mile for November deliveries. By
Elena Vasilyeva and Anna Harmon Send comments and request more information at
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