Coal Turns Ugly as Gas Cuts Use to 20-Year Low: Energy Markets

Coal Turns Ugly as Gas Cuts Use to 20-Year Low: Energy Markets

Coal demand in the U.S. is
collapsing as power companies switch away from the fossil fuel
to take advantage of the cheapest natural gas in 10 years.
Use of coal to generate electricity will drop 2 percent
this year to the lowest level since 1992, while gas-fired
consumption rises 5.6 percent, according to the Energy
Department. Gas prices have tumbled 14 percent this year amid a
boom in output and milder-than-normal weather.
Appalachian coal, the U.S. benchmark grade, sank 15 percent
in January and is down 26 percent from a 2011 high, prompting
companies from Alpha Natural Resources Inc. to Patriot Coal
Corp. and Arch Coal Inc. to close mines. Natural gas has dropped
35 percent in the past year as higher-than-average temperatures
cut demand and hydraulic fracturing, or fracking, at shale
formations drove inventories to record highs.
“It’s very ugly,” J. Christopher Haberlin, a Richmond,
Virginia-based analyst at Davenport & Co., an investment
brokerage, said by phone on Feb. 15. “Gas is a major driver and
the oversupply there has been well documented, but adding to the
pain is the unseasonably mild winter we’re having.”
Coal has dropped 15 percent to $58.95 a ton this year on
the New York Mercantile Exchange and is close to a two-year low.
Natural gas for March delivery rose 5.9 percent yesterday to
$2.567 per million British thermal units.
Gas costs for power plants dropped to the equivalent of
94.4 cents per million Btu below coal on Feb. 16 and plunged to
$1.16 on Jan. 19, the biggest discount since coal futures began
trading in 2001, according to futures prices and data compiled
by bg News.

Declining Demand

Arch, the second-largest U.S. producer, said Feb. 10 that
coal used to generate power may drop by at least 50 million tons
this year. The company is reducing output at the Dugout Canyon
mine in Utah in the first half of the year.
Patriot said this month that it will shut its Big Mountain
complex in West Virginia, which produced 1.8 million tons of
coal last year. Alpha plans to idle six operations between
February and early 2013, it said this month, and will alter work
schedules and cut production crews at some of its other mines,
citing weak demand.
Spokesmen for Arch, Alpha and Patriot didn’t return
telephone messages left yesterday for comment.
Total coal consumption for the week ended Feb. 9 was down
20 percent from a year earlier, according to Genscape Inc., a
Louisville, Kentucky-based data provider, which monitors coal
use by power producers with devices installed at the plants.

Utility Stockpiles

Utilities may have about 168.4 million tons of coal in
inventory at the end of this year, the lowest level since 2008,
Energy Department data show.
Gas production in the lower 48 U.S. states rose 1.3 percent
in November to a record 72.61 billion cubic feet a day, driven
by gains in states that contain shale reserves, the Energy
Department said Jan. 30 in its monthly EIA-914 report. Supplies
for the week ended Feb. 10, were about 38 percent above the
five-year average.
The average temperature in the contiguous U.S. for January
was 36.3 degrees Fahrenheit (2.4 degrees Celsius) or 5.5 degrees
above the 1901-2000 average, making it the warmest January since
2006 and the fourth-warmest on record, according to the National
Oceanic and Atmospheric Administration, curbing demand for
heating fuels.
Utilities and electricity transmission organizations that
have both coal and gas plants in their portfolios are relying
more on the cheaper fuel to produce power, said Christopher
Peterson, lead industry economist for the Office of Energy
Statistics at the Energy Information Administration, a unit of
U.S. Energy Department.

Power Generation

Coal accounts for about 45 percent of electricity
generation, while gas totals about 24 percent, Energy Department
data show.
Use of coal for power generation will drop this year to
916.4 million tons, the smallest amount since 1992, according to
the Energy Department. Gas-fired power production will increase
5.6 percent as electricity demand rises just 0.4 percent, the
department said in an outlook report on Feb. 7.
“It’s not the best-kept secret in the world that gas is
hurting coal burn,” Mike Dudas, an analyst at Sterne Agee &
Leach Inc., a Birmingham, Alabama-based brokerage, said by phone
on Feb. 15. “One thing that’s not going to help coal is 40-
degree weather in Chicago in February.”
Coal is unlikely to receive a boost from foreign demand as
it did last year as economies in Europe struggle to stave off a
recession amid rising debt, Haberlin said. Exports are expected
to fall 8.7 percent to 97.6 million tons this year from 107
million in 2011, which was the highest level since 1991,
according to Energy Department data.

Foreign Sales

Europe was the largest buyer of U.S. coal last year through
September, accounting for about 50 percent of exports, according
to the most recent data from the Energy Department. The region’s
economy shrank 0.3 percent in the fourth quarter from the prior
three months, the first contraction since the second quarter of
2009, the European Union’s statistic office in Luxembourg said
Feb. 16.
“The one real window of support has closed,” Lucas Pipes,
an analyst at Brean Murray Carret & Co. in New York, said in a
phone interview. “You’re really not making money selling
thermal coal right now.”
Utilities are also switching to gas from coal because of an
impending government rule that calls for Texas and 26 eastern
states to cap sulfur dioxide to limit acid rain and soot.

Shutting Down

The rule, combined with the declines in gas prices, may
force utilities to close about 12 percent of the nation’s coal-
fired generating capacity, according to IHS CERA, an Englewood,
Colorado-based provider of energy data.
American Electric Power Co. and Southern Co. are among
power producers that plan to boost gas-fired output at the
expense of coal. Dominion Resources Inc. said Jan. 27 that it
would convert three of its coal units to burn wood.
Mining costs to dig thermal coal out of the ground range
from $65 to $75 a ton for a Central Appalachian coal producer,
Levin said, as much as 27 percent more expensive than the
current price.
“It’s very difficult for a producer of steam coal to make
money in this environment,” Levin said. “There simply isn’t
demand for utility coal. Why would you continue to run?”