Coal – thermal and metallurgical – has been beaten badly in the last year but some signs are emerging that the worst maybe behind and that some stability and perhaps a small return of demand in thermal coal maybe ahead.
The price difference between natural gas and thermal coal as well as appreciating Euro may have placed a floor under this dirty energy input.
For thermal coal, there are two distinct markets – one in the US and another elsewhere.
In the US, the thermal coal is a trade-off with natural gas. Demand for such coal goes down as the price of natural gas falls.
For the past year, electric utilities have been dumping coal, not just because of regulatory pressure, but also because natural gas was too abundant and cheap. As a result, share of coal in electricity production plunged while nat gas rose.
For example, in 2011 natural gas held 22.3% of the electricity generation for the first half, but by 2012 nat-gas is at 30.4%, a virtual tie with coal.
BNP Paribas says that economics of coal prices for 2013 look favorable but not sufficient to meaningfully change the balance against natural gas.
But this also means that coal will stop hemorrhaging and that some stability in the US maybe ahead of us. This, of course, may mean that some badly beaten coal names with thermal exposure, like ANR and BTU, may have already bottomed.
ANR, for example, is cutting some thermal jobs but it is also rebalancing its business with more focus on exports.
“On the thermal side of the equation, we have been focused on the U.S. markets in the past. (We are) trying to scale up our platform as rapidly as possible to participate in global markets,” says ANR CEO Kevin Crutchfield.
Crutchfield says that thermal coal business in the US is shrinking and globally he sees a rise by 2 billion tons over the next 10 to 20 years, a long time perspective that provides only marginally small gains per year.
Meanwhile, the QE3 may be in impetus for a more thermal coal firming on the global markets. China and India are seen as growing users but some also see Europe switching out of natural gas in favor of coal.
Europe does not have the shale-gas revolution like we do in the US so the switch is more of a function of the exchange rate rather than nat-gas price.
With the falling dollar against the Euro some see a pickup in thermal coal buying out of Europe because more profit could be gotten for the utilities. For example, at the Euro exchange rate of $1.60 German utilities profit at 16.25 Euros per megawatt delivery while on the bottom end, $0.93 they lose only 6.97 Euros.
Analysts see Euro trading between 1.40 and 1.20, plenty of space for these utilities to generate profit.
On the metallurgical coal side, however, things are not so rosy as Chinese steel mills keep dumping steel and curtailing production.
As a result, the price of met-coal has plunged from high $200 per ton in 2011 to about $160 with Japanese steel makers settling at this price with Australian miners.
“We do not suspect the current price structure can persist for too long. The benchmark number being talked about out of Pacific Rim is untenable for the producers on a sustainable basis,” says ANR’s Crutchfield.