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Falling Coal Inventories in June 2015 May Not Offset Low Natural Gas Prices

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Coal inventories

In its August 26 report, the EIA (US Energy Information Administration) published data that specified coal inventories with utilities at the end of June 2015. Warmer weather across the US led to a fall in coal inventories at power plants, as utilities burned more coal to meet the electricity demand for cooling.

Bituminous coal inventories with power plants in the US dropped to 62 million tons, or 73 days of burn, at the end of June 2015—compared to 64 million tons, or 74 days of burn, at the end of May 2015. However, bituminous coal inventories were substantially higher than the 53 million tons, or 55 days of burn, in June 2014.

Sub-bituminous coal inventories saw a drop to 78.7 million tons, or 65 days of burn, at the end of June 2015, compared to 83.8 million tons, or 71 days of burn, at the end of May 2015.

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Why it matters

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

Utilities order fresh shipments of coal when inventories reach certain levels. The EIA publishes coal inventory data monthly, and analyzing the data from these reports provides key insights into coal demand in the near future.

Lower days of burn are generally positive news for coal producers—for example, companies like Peabody Energy Corporation (BTU), Cloud Peak Energy (CLD), Alliance Resource Partners (ARLP), and Arch Coal (ACI)—because they can expect demand from utilities restocking coal. But in the current low natural gas price environment, utilities will likely switch to natural gas, which will put the expected demand for coal restocking at risk.

For various utility companies’ market exposure, check out the Utilities SPDR ETF (XLU).

In the next and final part of this series, we’ll discuss capacity factors for coal-fired power plants and other effects of the EIA’s most recent report.

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