Soaring demand for coal and spiking prices should open new markets at home -- and to a lesser extent overseas -- for low-cost, low-sulfur coal from Wyoming's Powder River Basin, providing a boost for the miners that produce it and the railroads that move it.

PRB coal is the world's cheapest source of electricity, said Dan Scott, director of equity research at investment bank Dahlman Rose. In today's market, that creates interesting opportunities for miners and the railroads hauling the coal.

Global demand for coal has increased largely due to the rise of developing markets like China and India, heightening interest in U.S. coal -- previously deemed too expensive -- especially coal from the Appalachian Mountains in the east.

As a result, Appalachian coal prices have soared. According to the U.S. Energy Information Administration, on June 6 Central Appalachian coal sold for an average $108.25 per short ton, and Northern Appalachian coal at $105.00, more than double the price from a year ago. Much of the increase has been fueled by the overseas demand.

According to the EIA, U.S. coal exports rose to 59.2 million tons in 2007 from 49.7 million in 2006, an increase of 19 percent. This year, coal exports are expected to hit 80 million tons, a 35 percent jump.

Meantime, in the past year the price of PRB coal has surged nearly 70 percent to $14.10 per short ton from around $8. According to the EIA, the PRB produced 472 million tons of coal in 2006, up from 430 million tons in 2005.

The main drawback for PRB coal is that it produces around 30 percent less energy, measured in BTUs, than Appalachian coal. While Appalachian coal can be used for steelmaking, PRB coal is good only for burning in power plants.

With few predicting coal prices will fall any time soon, the railroads and mines serving the PRB say they are looking to fill the gap left by Appalachian coal exports.

They are also weighing the options for exporting PRB coal.

We're in the talking stages right now (with East Coast utilities) and we'd like to move to the shipping stages soon, said Matt Rose, CEO of No. 2 U.S. railroad Burlington Northern Santa Fe Corp. BNSF and No. 1 U.S. railroad Union Pacific Corpboth serve the PRB.

Rose said BNSF is also talking to potential customers abroad about exporting PRB coal and looking at the logistical challenges of exporting large quantities. The mining companies say they, too, are talking to customers abroad, and both sides say they have enough capacity to handle increased demand.

Analysts say while there is significant potential for PRB coal to move into East Coast utilities, exporting large amounts of this coal would require major infrastructure investments.

While I wouldn't count out exports, that will be a much smaller part of the story, said railroad analyst Tony Hatch of ABH Consulting. The real opportunity here is for PRB coal to replace eastern coal as it heads overseas.

A 2009 STORY

It will take some time for U.S. East Coast utilities to burn more PRB coal, first and foremost because most utilities have yet to feel the real pain of high coal prices. They tend to have two- or three-year contracts locking in coal at a particular price, said Dahlman's Scott.

As those contracts near the renegotiation point and utilities face the prospect of paying $100 a ton for Appalachian coal, smart CFOs will look at other options, he said. It's not imminent, it's definitely a 2009 story.

Scott estimates that including shipping costs, on a BTU equivalent basis at current prices, PRB coal is between $40 and $50 per ton cheaper than Appalachian coal. Although refitting a plant to burn PRB coal costs around $100 million, if you burn millions of tons of coal you can recoup that money quickly.

That should be good news for the coal mining companies in the PRB -- Arch Coal Inc, Peabody Energy Corp, Foundation Coal Holdings Inc and Rio Tinto -- especially as this will push up PRB coal prices.

But even if PRB coal rises to well into the $20s per ton, the differential will still be attractive, he added.

With time to kill, some utilities are trying test burns of PRB coal, said Steve Bobb, BNSF's vice president for coal.

There are a number of issues that a utility has to look at when considering adding PRB coal to the mix, said Todd Allen, a spokesman for Foundation Coal. Issues including a simple matter of space -- if you have to burn more of it to get the same amount of energy, you need bigger stockpiles -- plus PRB tends to leave residue on boilers that requires cleaning.

Exporting PRB coal brings a whole range of other issues, including a tendency of PRB coal to spontaneously combust if not shipped properly. But the biggest problem is logistical -- besides two ports in the Pacific Northwest and some capacity in the Gulf of Mexico, shipping it out of the country is hard.

Unless China or someone else invests serious money in new ports, the scope for exports is limited, Dahlman's Scott said.

Doug Glass, vice president for energy at Union Pacific said that while the company is talking with potential customers abroad, we're more interested in selling PRB coal to utilities in the eastern United States.

We have a bunch of people out in the field now kicking the tires to see how that's going to work, he added. (Editing by Maureen Bavdek)

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