Summary
Both steam and metallurgical coal demand are down. United States steam coal (for electricity generation) is down due to the economic slump affecting industrial demand and switching to cheaper natural gas-fired electricity generation in some areas of the nation. Metallurgical coal demand is down due to the crushing drop in steel production domestically and globally. Although coal demand is down significantly, it does not necessarily allow coal under contract to be excused for purchase.
Analysis
In spite of coal plant burns being down due to economics and coal-to-gas switching to the point that it may not make sense to continue to take delivery or there is no storage room for additional shipments, thermal coal volume commitments will be honored or modified to keep the coal producers whole.
In the event of an anticipated shortfall on the purchase volume commitments, the producers and buyers will work out relief through buying out the profit component on the undelivered tons during the year, carrying over the shortfall tons to the following year, or other restructuring means. The producers will maintain the value of the initial coal supply agreement.
Metallurgical coal, on the other hand, has a risk that buyers may try to restructure through postponements or price reductions the volume obligations.
