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Receding Winter Adds to Coal Producers' Woes

PART:
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Part 3
Receding Winter Adds to Coal Producers' Woes PART 3 OF 10

Natural Gas Prices Drop, Put Pressure on Coal

Natural gas prices

The shale gas boom led to a massive rise in production. It also led to a fall in natural gas prices. As a result, natural gas became a competing fuel for coal. It ate away market share from coal in electricity generation.

Natural gas prices and coal’s market share in electricity generation are related. When natural gas prices rise, coal gains market share. It becomes more economical to burn coal for power generation. A fall in natural gas prices generally leads to a drop in coal’s market share. Natural gas is available at cheaper rates.

Natural Gas Prices Drop, Put Pressure on Coal

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Week ending March 27

With higher inventory, natural gas prices slid during the week ending March 27. The Henry Hub benchmark price dropped to $2.69 per British thermal units in millions (or MMBtu), from $2.78 a week earlier.

During the same period, the front month contract prices dropped to $2.76 per MMBtu compared to $2.82 a week earlier.

Impact on coal and utilities

A drop in natural gas prices is negative for coal producers (KOL) such as Alpha Natural Resources (ANR) and Arch Coal (ACI), as natural gas becomes cheaper than coal as a fuel in electricity generation.

For utilities such as PG&E (PCG) and Southern California Edison (EIX), the impact depends on the level of regulation. If their contracts are strictly on cost plus basis, where they get a fixed return over and above costs, it doesn’t impact them much. For utilities with fixed price contracts, where they get a fixed price irrespective of changes in input costs, the fall in natural gas prices is positive.

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