Over 90% of the coal produced in the US is used for electricity generation. The utilities segment is coal’s largest end user. As a result, coal investors should watch for trends in electricity generation.
Electricity storage is expensive. Most of the electricity produced is consumed instantaneously. As a result, we can say that electricity generation mirrors consumption.
Electricity generation falls back
During the week ending February 13, electricity generation in the US fell back to 77,635 gigawatt hour, or GWh, down from 79,150 GWh during the week ending February 6. Electricity generation in the Southeast, central industrial, and Pacific Southwest rose, and fell in other regions.
While electricity generation increased week-over-week, it remained below historical levels. During the same week last year it was 83,3745 GWh. The five-year average is 78,225 GWh.
What does this mean?
Thermal coal is almost entirely used for electricity generation. As a result, assuming everything else remains the same, a decrease in electricity generation is negative for coal producers (KOL) including Peabody Energy (BTU), Alpha Natural (ANR), Arch Coal (ACI), and Cloud Peak Energy (CLD).
As well, in the current environment, natural gas prices are low, which adds to the woes of coal producers. Note that the weekly electricity data are subject to seasonality factors and aberrations.
You can access all major coal companies through the iShares Russell 3000 ETF (IWV).
Weekly coal production data may give some idea about the demand for coal in electricity generation. Demand for coal, however, also depends on natural gas prices. In the next part of this series, we’ll look at coal shipments in the US for the week ending February 13.