Last year an influx of U.S. natural gas supplies caused prices to slump to a ten year low, driving utilities to increase the amount of natural gas they use relative coal in their energy mix to generate power. In fact, U.S. natural gas consumption rose to 25.5 trillion cubic feet in 2012- the highest level on record, according to the EIA.
What was good for the natural gas market was bad for the coal market.? As coal fell out of favor with utilities prices fell, and the effects spilled over into coal stocks which were already getting hammered by skyrocketing operating costs stemming from enhanced environmental regulations.
This year, natural gas, which has historically been more expensive than coal, is rebounding ? while coal prices continue to hover near historic lows. In theory, if natural gas continues to climb, electric companies such as Duke Energy (NYSE:DUK) and Southern Company (NYSE:SO) may readjust their energy mix to use more coal and less natural gas. Historically, natural gas has been pricier than coal, but the new abundance of supplies in the U.S. thanks to technological advancements which shrunk the cost of extracting natural gas has adjusted the market.
In February, the relative price difference between NYMEX Central Appalachian coal and NYMEX Henry Hub Natural Gas widened to more than $1 per million British thermal units, according to data compiled by Reuters. Despite the rebound in natural gas price, many coal plants remain more expensive than gas plants by about 25 to 50 cents per million British thermal units due to the higher efficiency of gas plants. In addition coal plants have higher operating costs, due in part to the fact that it costs more to transport coal than natural gas.
The rebound in natural gas prices has opened up the question of whether or not the market will revert back to its typical levels leaving last year just a blip in the energy market and not the new trend. In addition, investors have started asking if this means the coal market has bottomed, and is now the time to invest?
While the current situation does favor the use of more coal, natural gas is here to stay, at least domestically in terms of a preferred energy source.? Natural gas prices will have to see a substantial appreciation before coal consumption will skyrocket- and with plenty of natural gas to go around; this is not likely, at least not as a longer term trend.
So are coal prices, and by default coal stocks doomed?? The simple answer is no.? A rebound in the coal market is still going to happen over the long term, but the U.S. would be the driver. Domestically, the EIA expects coal use to decline. At its peak, coal provided 53 percent of power supplies in the U.S. Today it supplies about 42 percent, and by 2040 it will fall to 35 percent.
While the outlook for the coal industry in the United States remains bleak, demand for coal from emerging markets is expected to swell. The U.S. has the luxury of being able to select what energy source to use to meet its power needs, but in many counties coal is the only economical and reliable option.? Coal already provides 41 percent of the world?s power and that is set to grow significantly, according to the International Energy Agency. By 2030 coal will be the most widely used?fuel worldwide as developing countries use coal to power their rapid growth.
The two major markets driving coal prices will be China and India. In?China, coal fuels 80 percent of electric generation, and the country?s rapid growth will result in the country consuming more coal each year than the rest of the world combined, according to EIA figures. ?China does have considerable domestic coal reserves, but they won?t be enough to meet the projected demand. ??India?is second only to?China?in building coal plants to feed a skyrocketing demand for power, however, it does not have the domestic reserves and is therefore reliant on exports.
It is not a question of whether or not these countries will need coal, its where will they get this coal from.
To the degree that this coal comes from the United States, U.S. coal prices will rise and U.S. companies that position themselves to capitalize on this new market will prosper, regardless of the domestic demand for coal.
There are dozens of US coal companies that export their coal to Asia, here are a few examples:
Peabody Energy (NYSE:BTU), ?Alpha Natural Resources (NYSE:ANR), Arch Coal (NYSE:ACI), Consol Energy (NYSE:CNX).
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