Oil, natural gas, and alternatives dominate the headlines when it comes to energy. But there’s a big and largely overlooked revolution occurring with the energy source likely to become the most preferred fuel for a world in economic decline: coal.
The United States coal sector has been hit very, very hard this spring. Demand has been crushed by over 10%, as warm weather and bountiful supplies of cheap natural gas have induced power plant operators and all other users where possible to switch away from domestic coal. The rapid change in fortune has sent the stock prices of big, listed names such as Peabody and Arch down by double digit percentages, as the Dow Jones U.S. Coal Index has fallen below 160 from above 225 at the start of 2012.
Central Appalachian thermal coal futures, the U.S. benchmark, averaged $60.20 during the first quarter, down from an average of $73.58 in the year ago period and down from a high of $143.25 in July 2008.
“It’s like a perfect storm,” Mann said. “The three main challenges are the really mild winter, a lethargic economy and on top of that, with gas prices being so low, those utilities that can burn gas have opted to burn gas instead of coal because gas is so cheap.”
Cheap gas has undercut power producers’ revenues because it drives down wholesale electricity prices, squeezing margins for plants that run on nuclear, renewable and coal power.
Moody’s Investors Service changed its outlook for the U.S. coal industry to “negative” from “stable” on May 7, citing weak prices and a drop in power demand, and said it expects a 5 percent decline in prices for coal deliveries in 2013. The U.S. Energy Information Administration expects the industry to see a 10.9 percent decline in coal consumption this year and Moody’s expects U.S. coal demand from power plants to plunge by 100 million tons by 2020, the ratings company said in the report.
Given the rather weak near-term and long-term outlook for U.S. coal demand, it’s not surprising that within such a capital-intensive business, a number of smaller coal producers were hit recently with bankruptcy rumors. Indeed, even large cap names like Arch Coal have seen an escalation of concern over debt levels. Accordingly, many have concluded that coal — in an era of solar, wind, and natural gas — has finally displaced itself due to its problematic extraction, distant transportation, and overall costs. Is coal finally going away as an energy source?
Not a chance…