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Utilities Flocked to Stock Cheap Coal in October 2015

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Coal inventories

In its December 24, 2015, report, the EIA (U.S. Energy Information Administration) published data about utilities’ coal inventories at the end of October 2015. Bituminous coal inventories with power plants in the United States increased to 64.7 million tons, or 87 days of burn, as of the end of October 2015. This compares to 57.9 million tons, or 79 days of burn, at the end of October 2014.

Bituminous coal inventories were also higher than the 59.6 million tons, or 87 days of burn, at the end of September 2015. Sub-bituminous coal inventories saw an increase to 84.1 million tons, or 80 days of burn, at the end of October 2015. This compares to 76.5 million tons, or 76 days of burn, at the end of September 2015 and 53.4 million tons at the end of October 2014.

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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, so utilities tend to stock up on coal in advance in order to avoid disruptions.

Lower coal inventory at power plants is generally positive for coal (KOL) producers such as Peabody Energy (BTU), Cloud Peak Energy (CLD), Alliance Resource Partners (ARLP), and Arch Coal (ACI). This is because these companies can expect demand from utilities that are restocking coal.

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.

However, in the current low natural gas price environment, utilities are likely to switch to natural gas, which can put the expected demand for coal restocking at risk. Moreover, the retirement of coal plants due to mercury and air toxics standards (or MATS) is expected to hamper the demand for coal.

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