Demand

Coal is primarily consumed by utilities to generate electricity. It is also used by steel companies to make steel products and by a variety of industrial users to heat and power foundries, cement plants, paper mills, chemical plants and other manufacturing and processing facilities. In general, coal is characterized by end use as either steam coal or metallurgical coal. Steam coal is used by electricity generators and by industrial facilities to produce steam, electricity or both. Metallurgical coal is refined into coke, which is used in the production of steel.
 
Steam coal is used by electric utilities throughout the United States to generate power for industrial, commercial and residential consumption. For the year ended December 31, 2012, data from the U.S. Energy Information Administration (“EIA”) showed that the United States relied on coal for approximately 37% of its power generation, compared to approximately 30% for natural gas. Over the past ten years, EIA data shows that coal averaged approximately 46% as the source of power generation in the United States, compared to an average of approximately 22% for natural gas. We believe the decreased use of coal for power generation in the United States during 2012 was driven by historically low prices for natural gas, which caused utilities to switch from coal to cheaper natural gas for power generation. Our assumption indicates as natural gas prices return to more normal levels, the use of steam coal for power generation will increase from 2012 levels. However, we suspect that the use of steam coal for power generation in the United States will likely not return to historical levels due to government regulations of coal-fired power generation plants.

Coal has historically been the lowest cost fossil fuel used for base-load electric power generation, being less expensive than natural gas or fuel oil. Coal-fueled generation is also competitive with nuclear power generation on a total cost per megawatt-hour basis. Thus, our belief is steam coal will remain a significant source of power generation in the United States in the future. In addition, the EIA reports that coal will remain the primary source of power generation world-wide as developing countries across the globe are projected to increase power generation in the future. As a result, our expectation is that steam coal exports from the United States to developing countries will increase in the future as world-wide power generation is forecast to grow through the year 2035.
 
For metallurgical coal, we believe recent economic weakness in Europe and Asia has caused a decrease in the production of steel, which has had a negative effect on the world-wide demand and price of metallurgical coal used in the steel making process. We feel that when economic conditions improve in these areas, steel production will increase and world-wide demand for metallurgical coal will also increase.