Industrial Metals

Record low gas prices are pushing coal out of the US energy mix, resulting in rising US thermal exports and falling global prices.

By James Wellstead — Exclusive to Coal Investing News

Cheap Gas Hurts US Coal

Abundant and cheap natural gas is a major factor currently shaping the US coal market, as decade-low gas prices have encouraged utilities and power companies to switch from once-cheap coal to gas. As excess US thermal and coking coal roams overseas, abundant supply and soft Chinese and Indian demand have pushed prices into a downward spiral.

Executives at Southern Company (NYSE:SO), an Atlanta, Georgia-based utility company, recently announced that the holding company will respond to cheap gas prices by increasing gas consumption by 40 percent and reducing coal consumption by 20 percent over last year’s figures. Set to consume 45 million tons in 2012, coal consumption by Southern is down almost 45 percent since 2007.

Flagging coal demand in the US is partially a product of rising coal production costs, but US government figures and even company executives have cited record-low gas prices for knocking coal and coal companies off their stride.

Patriot Coal (NYSE:PCX) announced last week that it will begin idling its Freedom underground mine in Kentucky, adding to the three central Appalachian coal mines that were taken offline back in January.

“Thermal coal markets remain weak as a result of the mild winter, coupled with low natural gas prices and reduced demand for electricity related to the economic downturn. We are taking this step to align production with committed sales,” said Patriot Executive Vice President and Chief Operating Officer, Bennett K. Hatfield, in the company’s press release.

Arch Coal (NYSE:ACI), which idled more than five million tons worth of capacity back in February, is now seeking buyers for a number of its thermal coal mines. The fact that Arch could receive upwards of US $600 million for the mines, according to a Bloomberg article, is proof that the sector continues to have strong prospects. However, warm winter weather and weakening steel demand have put the company’s sales projections in doubt, leading the rating service Standard and Poor’s to put the company’s stock on watch for a potential downgrade.

Overall, US coal consumption fell by 18.8 percent in Q4 of 2011 to 227.1 million short tons, hitting its lowest level since Q2 of 1995, according to the US Energy Information Administration. But while demand is down in the US, total consumption has been offset by an increase in exports to Europe and Asia.

Some 25 percent of US exports in Q4 were to Japan, South Korea, and China, which had the partial effect of lowering thermal coal prices across the wider Asian basin.

“Chinese demand is less positive and there’s more US coal coming in due to availability of cheap shale gas there. Also, there’s an oversupply situation even in Indonesia,” Platts reported.

Until demand returns in many of Asia and America’s markets, cutting production appears to be the most effective strategy for companies producing in high-cost areas such as the Appalachian basin. Low-cost producers have the benefit of remaining operational to meet what was once seen as a persistent and unquenchable Asian appetite for coal power, but whether producers can continue to keep costs low enough in this era of cheap gas remains to be seen.

Platts recently assessed the daily 90-day prices for FOB Kalimantan 5,900 kcal/kg GAR at US $90.35/MT and 5,000 kcal/kg GAR at $70.40/MT, both down ten cents on April 25.

Higher-grade FOB Newcastle 6,600 kcal/kg thermal coal has also fallen precipitously this year, off by 17 percent since the beginning of the year on weak Chinese demand, settling at US $103.25 on April 24 according to globalCOAL data.

Company news

Diversified miner Teck Resources (TSX:TCK.B) reported a twelve percent increase in quarterly operating earnings earlier this month on the back of strong coking coal pricing and volumes which offset the impact of sharp declines in its other business units.

Teck reported that its coal segment benefited from investments in new mining equipment and plant upgrades, which helped reduce fixed costs and boost output by 43 percent in the quarter. The success of its coal operations flies in the face of China’s perceived continued downturn as Teck said the developing nation could be on track to hit record steel production figures in 2012.

Coking coal prices have surged in recent months, carried by reports of an upcoming ten percent growth in China’s steel production, which have carried price forecasts up almost US $20/ton by June 30 to $225/ton.


Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.


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