Coal Turns Ugly as Gas Cuts Use to 20-Year Low: Energy Markets
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.
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?”
Eoin Treacy's view US coal miners were among the hardest hit following the July/August sell off and have been slow to recover. Coal futures remain in a relatively consistent downtrend and while prices have paused in the region of $63, a sustained move above $68 will be required to break the progression of lower rally highs and question supply dominance.
The Coal / Natural Gas ratio hit an accelerated peak above $25 earlier this week and appears to be in the process of unwinding the overbought condition. The short-term risks appear to be to the downside.
A supply glut has been the abiding theme in the natural gas market for the last few years, with slow economic growth sapping demand and a jump in unconventional production contributing to the lowest prices in a decade. However, if power companies are going to be forced to use less coal, then natural gas is likely to be a beneficiary. Prices have stabilised near $2.50 and have held a progression of higher lows since late January. A sustained move above $2.85 would break the progression of lower rally highs and suggest a return to demand dominance beyond the short term.