coal seen staging comeback

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Thermal coal prices could fall further if US exports rise: analysts

Singapore (Platts)--3May2012/850 am EDT/1250 GMT

Thermal coal prices could soften further if US exports to Asia strengthen, although resilient demand from Asia-Pacific's utility sector could partially offset this increased supply, analysts at Standard & Poor's said Thursday.

Domestic coal demand in the US has weakened due to the availability of cheap shale gas there, which has in turn led to increased coal exports from the US to European and Asian markets, pressuring thermal coal prices.

Indonesian and Mongolian miners are feeling the heat from steep fuel costs, analysts May Zhong and Suzanne Smith said in the note.

"We're in a different price environment now," said BNP Paribas analyst Teri Viswanath. "The rapid pace of coal-to-gas switching may not continue."

Analysts estimate that year-to-date switching has added between 4 Bcf/d and 8 Bcf/d of gas demand across the US. That is in contrast to the 2.8 Bcf/d of coal-to-gas switching that occurred last year, 2.5 Bcf/d in 2010 and 3 Bcf/d in 2009, according to Tudor Pickering Holt.

AEP, the largest power generator in Ohio, which has 27% of its installed capacity as gas-fired, said recently it has hit its peak of coal-to-gas switching capabilities, according to an analyst note from Jefferies & Company last week.

"The power producer said further eastern US market share gains by gas could be limited to a single 655 MW Hess plant in Newark, New Jersey," the note said.

In the Southeast, big electricity producer Southern Company said it projects its power generation fuel mix this year to be 47% natural gas and 35% coal, compared with 40% gas and 40% coal in the fourth quarter of 2011. But "we continue to maintain our operational flexibility to increase our use of coal in the event of a sharp reversal in the price of natural gas," said Southern President and CEO Tom Fanning in a recent earnings call.

The Energy Information Administration on Thursday released data showing weekly rail car shipments of coal stood at 111,191 for the week that ended May 19, up a modest 983 cars since the week ending April 14, when the NYMEX gas contract bottomed out at $1.981/MMBtu.

Prior to April 14, EIA data showed the number of rail car shipments falling dramatically -- from 123,759 for the week that ended February 4 to the 110,208 for the week that ended April 14 -- as the NYMEX gas contract also took a dive from nearly $2.50/MMBtu to below the $2/MMBtu mark.

A trader who buys for utilities put it starkly: "We've hit the peak for switching. We're at the point of the year where coal comes back on as baseload."

Sources explained that utilities tend to prefer running coal as a baseload unit because of its ability to generate power at a constant rate 24/7, whereas gas units tend to be more flexible in nature and are relatively easier to bring online and offline at varying rates.

Burning coal over gas, however, may not just be a question of price, analysts and traders said. Utilities that have take-or-pay coal contracts and are facing brimming coal storage inventories may have little choice but to use coal.

Barclays Capital last week said power sector coal stocks would reach 193 million tons this year, close to estimated storage capacity of some 200 million tons. The option of exporting thermal coal is also quite limited, the analysts stated, due to softening demand abroad that has narrowed international price spreads and limited port capacity.

According to a marketer for power plants and utilities, "It's a lose-lose situation. Do you burn the excess coal you have and take the hit? Or do you buy gas even though it's not as competitive as before and burn it and take the hit?"