Cheap Gas Hurts US Coal

By James Wellstead — Exclusive to Coal Investing News

Cheap Gas Hurts US Coal

Abundant and cheap natural gas is a major factor currently shaping the US coal ma rket, as decade-low gas prices have encouraged utilities and power companies to switch from once-cheap coal to gas. As excess US thermal and coking coal roams overseas, abundant supply and soft Chinese and Indian demand have pushed prices into a downward spiral.

Executives at Southern Company (NYSE: SO), an Atlanta, Georgia-based utility company, recently announced that the holding company will respond to cheap gas prices by increasing gas consumption by 40 percent and reducing coal consumption by 20 percent over last year's figures. Set to consume 45 million tons in 2012, coal consumption by Southern is down almost 45 percent since 2007.

Flagging coal demand in the US is partially a product of rising coal production costs, but US government figures and even company executives have cited record-low gas prices for knocking coal and coal companies off their stride.

Patriot Coal (NYSE: PCX) announced last week that it will begin idling its Freedom underground mine in Kentucky, adding to the three central Appalachian coal mines that were taken offline back in January.

"Thermal coal markets remain weak as a result of the mild winter, coupled with low natural gas prices and reduced demand for electricity related to the economic downturn. We are taking this step to align production with committed sales," said Patriot Executive Vice President and Chief Operating Officer, Bennett K. Hatfield, in the company's press release.

Arch Coal (NYSE: ACI), which idled more than five million tons worth of capacity back in February, is now seeking buyers for a number of its thermal coal mines. The fact that Arch could receive upwards of US $600 million for the mines, according to a Bloomberg article, is proof that the sector continues to have strong prospects. However, warm winter weather and weakening steel demand have put the company's sales projections in doubt, leading the rating service Standard and Poor's to put the company's stock on watch for a potential downgrade.

Overall, US coal consumption fell by 18.8 percent in Q4 of 2011 to 227.1 million short tons, hitting its lowest level since Q2 of 1995, according to the  US Energy Information Administration. But while demand is down in the US, total consumption has been offset by an increase in exports to Europe and Asia.

Some 25 percent of US exports in Q4 were to Japan, South Korea, and China, which had the partial effect of lowering thermal coal prices across the wider Asian basin.