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Utilities Continue Stocking Up on Cheap Coal

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Coal inventories

In its July 27 report, the EIA (U.S. Energy Information Administration) published data regarding coal inventories with utilities at the end of May 2015. Utilities benefited from low coal prices and continued expanding their coal stocks. As a result, bituminous coal inventories with utilities in the US rose to 64 million tons, or 74 days of burn, at the end of May 2015—compared to 61.2 million tons, or 76 days of burn, at the end of April 2015 and 53.9 million tons, or 58 days of burn, at the end of May 2014.

While the tonnage rose month-over-month, the number of days of burn fell in May 2015—compared to the previous month—because the anticipated use of coal in the near future was higher at the end of May due to warmer weather ahead.

Inventories of sub-bituminous coal, which is primarily used in the western part of the US, rose to 83.8 million tons, or 71 days of burn, at the end of May 2015—compared to 81.6 million tons, or 77 days of burn, a month earlier and 59.9 million tons, or 49 days of burn, a year ago.

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Why is this important?

Coal inventories indicate coal demand in the near future. Coal-fired power plants burn coal almost continuously. They only take breaks during plant maintenance. The process of extracting and transporting coal takes time. In order to avoid disruptions, utilities stock up on coal in advance.

Utilities (XLU) order fresh shipments of coal when inventories reach certain levels. The EIA publishes coal inventory data monthly. Analyzing the data provides key insights into coal demand in the near future. Lower days of burn are generally positive news for coal producers (KOL)—including Peabody Energy (BTU), Alpha Natural Resources (ANRZ), Cloud Peak Energy (CLD), and Arch Coal (ACI)—because they can expect demand from utilities restocking coal. However, in the current low natural gas price environment, utilities will likely switch to natural gas. This will put the expected demand for coal restocking at risk.

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