Why delivered cost of coal and natural gas affects coal demand

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Delivered prices

Since power generation industry adjusts fuel preferences based on what it pays, investors must factor in the transportation costs to deliver natural gas and coal from major suppliers to buyers. It is the regional prices that affect coal demand and consumption, which in turn affects companies such as Cloud Peak (CLD), Peabody Energy (BTU), Arch Coal (ACI), Consol Energy (CNX), and Alpha Natural Resources (ANR).Delivered Cost of Coal and Natural Gas Coal price pattern

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Using EIA’s (Energy Information Administration) database, we’ve calculated the average cost of delivered coal and natural gas for different regions over the last three years. Inside the textboxes, we’ve shown coal prices first, followed by natural gas prices in parathesis on a MMBtu (million British-thermal-unit) basis. Because Powder River Basin coal is cheaper, delivered coal prices are generally cheaper in West North Central, Mountain, and West South Central regions. As we move to eastern states, coal becomes more expensive, especially in South Atlantic and New England where Appalachia mines (and in some cases Powder River Basin and Interior mines) are farther away from buyers.

Natural gas price pattern

Regional natural gas prices show a different pattern: natural gas prices rise from south to north. This is because the majority of natural gas production in the U.S. is happening in southern states and the Gulf, as applications of hydraulic fracking and horizontal drilling have allowed companies to tap large amounts of reserve previous considered uneconomical. Note that natural gas prices in East North Central have been cheaper than its neighbors over the past three years due to developments of shale oil and gas. Further production expansions would keep pricing pressure between coal and natural gas intense.

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