After unrelenting bad news driven by retirements of coal-fired generation and the persistence of cheap natural gas, a round of summer reverse switching may boost the prospects for coal over the next 18 months. While there is too much surplus coal inventory to drive significant production growth in 2016, stronger natural gas pricing sets the stage for solid growth in 2017.
Natural gas storage and pricing trends
This past mild winter led to a large surplus of natural gas, keeping wintertime prices to electric generators highly competitive. This ensured that the very large displacement of coal that took place during the 2015 spring shoulder season resumed in full force once the summer ended, effectively extending coal’s losses through the entire winter. Overall, coal producers lost over 135 million tons of annual production to lower coal generation. By the end of 2015, natural gas generation surpassed coal for annual market share for the first time.
For coal, a poor 2015 followed by a worse 1H 2016
2016 has started out little better, with coal dropping another 65 million tons of shipments through the end of the mild winter and into the 2016 spring shoulder season. To put the overall market decline in perspective, since coal production approached 1 billion tons in 2014, production has fallen by over 200 million tons through the second quarter of 2016, with 150 million tons of demand reduction (coal retirements and displacement by natural gas), 20 million tons of reduced exports, and 30 million tons of excess inventories.
Coming off the bottom?
But the recent rally in natural gas prices may set the stage for rally in coal demand as well. While the mild winter left natural gas inventories more than 800 Bcf in surplus and Henry Hub pricing routinely below $2/mmBtu, that surplus has been whittled away since late April. With a head start on storage fill, the market has been injecting gas at rates below normal, cutting the surplus by 40% to 524 Bcf by mid-July. Natural gas prices have responded by moving up by $1.15/mmBtu, nearly reaching $3/mmBtu at Henry Hub. Coal prices during this time have moved up much more slowly, with the market still burdened by excess coal inventories. The result is a growing price spread in favor of coal that is driving greater coal plant utilization and beginning to reduce coal inventories. This effect can be seen in slowly growing coal shipments since late June.
Correspondingly, the strong rally in natural gas has stalled shy of $3/mmBtu, suggesting that gas-fired generation is starting to give way to regional coal plants, primarily in the West, Midwest, and Gulf South where Powder River Basin and Illinois Basin coal producers are in closer price competition with natural gas. Displacement of natural gas generation resulting from this new price spread is estimated at 3.25 Bcf per day, creating a price headwind of 6-10 cents/mmBtu. Meanwhile, if pricing spreads between gas and coal implied by the forward strip hold, incremental demand for coal could grow by 74 million tons over the next 18 months, sufficient to clear excess inventories and finally spur new coal demand.
Despite a drawdown in coal inventories, power plants are still expected to have a surplus at the end of 2016, keeping coal prices low. These factors – higher natural gas prices and the lagged response of coal in terms of inventory reductions – create the conditions for a rebound in 2017coal production that will at least partially lift it out of the steep hole created by 2015-2016 dislocation from natural gas.
Davy on Sat, 19th Nov 2016 10:39 am
The economy is near a real recession and has been in a disguised one of malinvestment and dysfunctional central bank policy. Demand destruction is the name of the game for heavy industry and trade as we speak. The numbers show stalling growth especially in the real economy. Asset markets don’t produce real goods and that has been where global growth has been. Coal is suffering from being uneconomic and from the distortions of the gas bubble which was a malinvestment of debt. Coal is also suffering from policy to decarbonize global energy markets. Coal probably won’t drop much becuase it is too essential to the global energy mix but don’t expect a surge of growth becuase the variables are not there. Coal is wounded but will be around as long as modern man is.
penury on Sat, 19th Nov 2016 11:32 am
“A comeback for Coal”? I had not noticed that it had been demoted.
Dredd on Sat, 19th Nov 2016 11:34 am
Don’t trust coal intuition or any other intuition that physics debunks (The Evolution and Migration of Sea Level Hinge Points – 2).
dave thompson on Sat, 19th Nov 2016 12:46 pm
When the fracked natural gas goes away the coal will be used. At least in the US of A.
rockman on Sat, 19th Nov 2016 1:32 pm
“This past mild winter led to a large surplus of natural gas”. Guess I’ll stop wasting time reading at this point. There was no surplus PRODUCTION last winter. And never will be during any winter. US NG wells are not capable of supplying winter demand. This is why $billions of NG are set to storage during the low demand months. So are they saying we had more NG in storage then we drew down last winter? Of course we did…just as we do every winter. There’s always more NG in storage then we need.
But even with the NG storage supply the US was still a NET NG IMPORTER thru all of last winter. Despite the fact as much NG as could be pulled from storage for during the middle of last winter Dec thru March the US imported ONE TRILLION CUBIC FEET OF NG. Someone needs to explain how importing 1 TCF of NG represents a SURPLUS.
https://www.eia.gov/dnav/ng/hist/n9100us2m.htm
And again don’t argue we exported more NG the we imported: the US was a NET NG EXPORTER thru all of last winter.
https://www.eia.gov/dnav/ng/hist/n9180us1M.htm
If folks don’t get their sh*t together and understand the different metrics we’ll keep wasting space here which such bullsh*t reports about “surpluses”.
rockman on Sat, 19th Nov 2016 1:53 pm
p – “I had not noticed that it had been demoted.” Exactly. Difficult to feel sorry for Australian thermal coal producers that saw its prices climb from $55/ton last summer to $100/ton today. As I mentioned elsewhere we are still dealing with incompetents using short term trends (a few years) to project decades down the roads. If one had done so with NG prices back in 2008 they would have predicted $30 to $50 per MCF today instead of the current $2.50/MCF.
Same old problem: the inability to appreciate the long lag times between cause and effect in the energy world which is complicated further by various feedback loops.
Bottom line: global coal consumption, despite a few small and short lived dips, has been on a relentless INCREASE FOR THE LAST 50 YEARS. In fact in the last 15 years we’ve seen the highest rate of increase in global coal consumption in history. Not only is King Coal not dead he has never been healthier since man started burning it:
http://peakoil.com/consumption/iea-cuts-coal-growth-outlook-in-half-as-china-peaks
Denial on Sat, 19th Nov 2016 6:39 pm
Then why here in Montana the coal companies are running ads saying coal towns are dying and we need to get behind them
rockman on Sat, 19th Nov 2016 8:12 pm
Denial – Maybe a Montana coal man knows…assuming one takes 30 seconds to search the web to answer your question:
“Montana coal production is down by nearly a third of what it was last year. From January to the end of April, coal companies in Montana produced 9.6 million tons of coal, 4 million fewer tons than last year.
Bud Clinch from the Montana Coal Council says it’s caused by a combination of economic and environmental issues. He says this year in particular has been difficult because of the mild winter weather. Most people don’t need to use coal energy for heat.
“The consumption at the utilities around the country are using less coal. Two, there is unprecedented low prices of natural gas. And the third factor coming into play is the total reduction in exports. And so that market has kind of dried up right now because it’s being filled by other Pacific Rim countries that have expanded their coal production.”
And then there’s an even better question: what do some crappy coal companies in East Jesus, Montana, have to do with the global coal production and consumption I was discussing? LOL. So I repeat:
“In fact in the last 15 years we’ve seen the highest rate of increase in global coal consumption in history.” IOW regardless of what’s happening in Bumfuck, Montana, the world is currently consuming more coal then ever before in history. LOL.
denial on Sat, 19th Nov 2016 11:14 pm
“Bud Clinch from the Montana Coal Council says it’s caused by a combination of economic and environmental issues. He says this year in particular has been difficult because of the mild winter weather. Most people don’t need to use coal energy for heat.” Interesting because what we keep hearing around here it is because of Obama and the damn liberals! They won’t let them burn the coal…and a lot of folks here believe that…Hell even the trumpanzees seized on that making a big campaign issue….so much mis information going all around it is really hard to decipher the truth anymore….