Coal Producers Struggle to Meet Demand

U.S. coal producers have been largely unable to meet growing demand because of a lengthy permitting process, lack of capital investment and a shortage of skilled miners, which will keep supplies tight and prices high.

The underlying industrywide issues are compounded by severe floods in the Midwest, which have stranded barges full of coal and submerged railcars used to haul coal. It isn’t clear what impact those interruptions will have on supplies and prices.
Paul Forward, a coal analyst with Stifel, Nicolaus & Co., expects demand for coal in the U.S. to outstrip supply this year by 15 million tons, in large part because of the increase in exports, which shot up 49% through April compared with last year. Constraints to production also played a role in the growing shortfall, he said.

“Despite the strong margins that coal companies are seeing, the supply response has so far been limited,” said Mr. Forward. “I think it’s probably a couple years worth of time where these markets stay tight.”

Up to 40 million tons of potential and anticipated coal production is being held back because of delays in obtaining environmental permits and new safety regulations, estimates David Khani, director of research at FBR Capital Markets Inc. in Arlington, Va.

While 40 million tons doesn’t seem significant given that the U.S. produced 1.15 billion tons of coal last year, even small shifts in supply can have a big impact on price. The reason, analysts say, is that a large percentage of coal supply is tied up in multiyear contracts, so there is little slack to make up for production shortfalls. That could force some utilities to buy coal at current high spot-market prices and pass some of those costs on to consumers.

“People are going to get sticker shock when they open their electricity bills this summer and next summer,” said Mr. Khani. Price increases will depend on rules in individual states and on the hedging strategies of utilities.

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