Coal Will Be King Again - For A While
By Myra P. Saefong
September 23, 2017 - Coal lost its title last year as the top source for U.S. electric power and seemed on a path toward irrelevance. Surprisingly, coal’s price performance this year has outpaced that of archrival natural gas, and it’s on track to reclaim the top spot in electrical generation before long.
“Coal’s recent price performance has been partially a reaction to persistently high [natural gas] prices,” says Richard Hastings, a macro strategist at Seaport Global Securities. “Throw in some [President Donald] Trump-induced hopes for reduced power-plant emissions regulations, and then coal gets another day in the sun.”
The price in the over-the-counter physical market for 8,800 British-thermal-units-per-pound coal from Wyoming’s Powder River Basin, home to the largest U.S. coal reserves, hit a two-year high of $12.55 per short ton on Jan. 24, 2017, according to S&P Global Platts. As of Friday morning, the price was at $11.35, down 7.3% year to date but up 0.4% year over year.
Last year, natural gas provided about 34% of total electricity generation at utility-scale facilities in the U.S., besting coal’s share of just over 30% to become the leading generation source, according to the Energy Information Administration. That was the first time that had occurred.
But Natural Gas' Reign May Be Short-Lived
In a report released earlier this month, the EIA said it expects this year’s natural-gas share of utility-scale electricity generation to fall to about 31% as coal climbs to match that figure. For 2018, coal is set to wrest the top spot once again, with its share poised to increase to an average 32% versus 31% for natural gas.
Strong natural-gas prices have helped to lower demand for that commodity and to increase demand for coal, says Will Rhind, CEO of GraniteShares, which offers broad-based commodity exchange-traded funds. Better pricing and increased demand have improved the “bottom line of many coal producers,” he says. Earnings reports from coal producers through June were “mostly positive, with about 70% delivering positive earnings surprises,” says Rhind.
Futures prices for natural gas jumped nearly 60% last year on the New York Mercantile Exchange. They’re down about 20% year to date, settling Friday at $2.959 per million British thermal units. However, they still trade about 10% above their low for the year.
In contrast, the VanEck Vectors Coal ETF (ticker: KOL), with holdings in coal-industry company stocks, has climbed nearly 19% so far this year.
Although many are inclined to attribute coal’s revival to Trump’s efforts to reboot the domestic energy industry, they’ve been a smaller contributor than changes in pricing dynamics, say analysts.
When Trump lifted a moratorium on federal coal leases in March, he vowed an “end to the war on coal.” Since then, new coal mines have opened, coal mining employment has risen, and exports have grown. Meanwhile, coal producers Peabody Energy (BTU) and Arch Coal (ARCH) have both emerged from bankruptcy caused in part by pressure from federal regulations.
But the new mines and higher employment are “not the result of the Trump administration,” says Dan Klein, managing director at PIRA Energy, an analytics unit of S&P Global Platts. They’re the “result of stronger coal demand and price[s], which were largely driven by the recovery in the natural-gas price, and the recovery in exports was due to an international rally in coking and thermal coal prices.”
U.S. coal exports this year are expected to climb 21% from the 2016 level, according to the EIA, which also forecasts an 8% rise in 2017 domestic production.
“China fits into this with a recovery of its own coal consumption, which has led to strong imports and a considerably higher international seaborne coal market” that has also “pulled some incremental U.S. coal into the export market,” says Klein.
The Trump administration, meanwhile, has “not been able to really move the needle on the coal market,” he adds. “Opening up coal leases on federal lands and the undoing of the Stream Protection Rule may marginally lower coal production costs, but this has had a negligible impact on the coal market.”
The big influence continues to be natural gas.
“Gas and coal are each other’s primary competitors,” says Robbie Fraser, commodity analyst at Schneider Electric. “If we look at coal’s decline over the past decade in the U.S., the numbers are clear: Renewables and regulations are only a small piece of the puzzle, because the majority of the impact has come from cheap shale gas.
“Now that gas prices are trending at least slightly higher, coal has gained a bit of ground,” he says.
Longer term, however, coal is doomed to lose market share. Even with Trump’s plans to exit the Paris Climate Agreement, which would further ease environmental restrictions on the sector, demand for coal should slow.
“The U.S. can export more coal, but the rest of the world, slowly but surely, is reducing its appetite for coal,” says Seaport’s Hastings. “This is a long and slow process…. Trump cannot do anything to change this. Coal is all about electric power plants…and wind and solar continue to expand in other countries, slowly eating into coal consumption.”
Coal is “still the king,” he adds, “but the throne is less glitzy than it used to be.”