Weather impacts demand
Weather is the most important indicator for coal’s short-term outlook. Weather determines the demand for natural gas during the winter. Natural gas is used for heating. During the winter, natural gas prices are primarily driven by the weather’s severity. If the winter is more severe than expected, demand for natural gas exceeds expectations. This drives natural gas prices up.
So far, the milder weather this winter kept natural gas prices subdued. As a result, coal producers (KOL)—like Alpha Natural Resources (ANR), Arch Coal (ACI), Peabody Energy (BTU), and Cloud Peak Energy (CLD)—are under pressure.
Falling natural gas prices is a short to medium-term indicator. More permanent changes are happening in the US energy mix space. Coal is almost nonexistent in new capacity additions. Coal-fired plants’ retirements could make things worse for coal producers. Also, coal’s capacity factors are falling. Natural gas’ capacity factors are rising, year-over-year, or YoY.
In the US, electricity demand remained stagnant—excluding last winter. Last winter, severe weather drove electricity generation up. The current environment really isn’t encouraging for coal.
In the week ending January 2, Powder River Basin coal prices dropped by $0.40 to $12.20 per ton. Surprisingly, central Appalachian spot prices increased by $1.50 per ton to $48.50. This could be because of the lower production in the region. Other coal prices remained stable during the week.
For more analysis on the coal industry and coal producers, visit Market Realist’s Coal page.