Forget Oil, Coal Remains King

"I was thinking I need to get a big part of the business that's growing 8% a year vs. relying on the U.S. market growing 1% to 2%," Boyce says.

That's paying off big time. China built 96,000 megawatts of coal-fired power plants last year, the equivalent of all of Britain's coal plants. The country is putting up coal plants at the rate of one every other week. India plans to build 75,000 megawatts of coal power by 2012.

Buoyed by foreign sales, Peabody recently said it expects per-share earnings of $2.50 to $3 in 2008, nearly double last year's results, on the production of about 230 million tons of coal, equivalent to 20% of the U.S. total. Its coal fuels 10% of U.S. electricity and 2% of worldwide power. It's also benefiting from a tripling in the price of coal to make steel.

Yet the torrid global market is squeezing the U.S. as mining companies divert coal to countries willing to pay much higher prices. U.S. coal exports should jump 39% in 2008 to 82 million tons, says Stifel Nicolaus analyst Paul Forward.

That, in turn, has tightened supplies. Prices for Appalachian coal have jumped from $45 to more than $100 a ton since last year. Citing soaring coal costs, dozens of utilities recently announced electricity rate increases of up to 30%.

Most of the exports are from Eastern mines, such as those in the Appalachians, that sell coal with higher energy content and are closer to Gulf of Mexico ports.

About 65% of Peabody's output — and 40% of U.S. production — is from the more productive Powder River Basin, a virtual Saudi Arabia of coal. Prices there are far lower, about $12 a ton, partly due to the coal's lower energy content. Also, coal can be extracted more easily from seams as thick as 100 feet vs. typical 3-foot seams in Appalachia.

Yet even Powder River coal is riding the export wave, with some heading to Europe and Asia and prices up 50% since last year. Peabody is also sending a growing portion of the region's coal to Eastern utilities to replace foreign-bound Appalachian coal.

The supply crunch is delaying shipments, forcing utilities to scramble to keep coal-fired plants running. "We're having to work very hard to get our coal delivered," says Vince Stroud, head of regulated fuels for Duke Energy.

If the shortage persists into next year as expected, utility inventories will likely fall so low they might have to scale back coal generation, replacing it with pricier natural gas, says Seth Schwartz, a principal at consulting firm Energy Ventures Analysis. Alternatively, he says, utilities will face another steep price increase — up to 70% — for coal, further pushing up power prices.

Boyce makes no apologies for the exports, saying utilities "are competing on a global basis to buy that coal, and they've never had to do that before."

Digging deeply

Perhaps no mine is better suited to meet surging demand than the 80-square-mile North Antelope Rochelle. It's an other-worldly moonscape gouged with 180-foot-deep pits, some flanked by football-field-length walls of coal, others already shorn bare.

Despite its size, the mine grinds along with assembly-line efficiency. After workers set off explosives to form a pit, a skyscraper-high shovel called a dragline removes the rocks and dirt covering the coal. Coal production is so high that several trucks typically queue up at garagelike structures where coal is unloaded and crushed into smaller bits.

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