Is Powder River Basin Coal on the Brink of Revival?

(Casper Star Tribune, April 21) – Stuck in the doldrums for much of the past two years, the coal industry may now have some wind at its back.

The recent reversal is owed to several factors, analysts said. An unusually cold winter in large swaths of the country sent natural gas storage plummeting.

The resulting increase in gas prices made coal economically competitive for the first time in years. Utilities, meanwhile, burned much of their remaining coal stockpiles, sending power plants’ on-hand reserves to their lowest levels since 2006.

In turn, coal spot prices rebounded to their highest levels in two years, an upward trend analysts expect to continue into 2015.

Spot prices on Powder River Basin coal reached $13 per ton recently, a level last achieved in December 2011. By comparison, the basin’s coal sold at $10.15 per ton at the end of January 2013.

“The point is that utility stockpiles have fallen to the level where utilities are going to need to get in the market for potentially large amounts of coal in 2014,” said Ted O’Brien, president of Doyle Trading Consultants, a Colorado-based firm that tracks the industry.

Still, challenges remain. Coal companies have been reluctant to ramp up production. Executives have said they want sustained increases in price and demand before committing to raising output.

Rail delays have also hampered the industry. Winter weather held back shipments in the Powder River Basin at the same time coal companies found themselves competing with oil and grain interests for space on the rails.

“If you were to look at PRB prices right now, I think the forward curve is high enough to provide enough of an incentive to bring added supply online,” O’Brien said. “The thing is they are not able to do that in a quick manner. It would take a lot of time and money, and even if producers were able to spend it, I’m not sure the railroads are able to carry it.”

Warmer weather and increased efforts by Union Pacific, in particular, to meet the demand should help reduce the delays for the remainder of the year, O’Brien said.

Arch Coal and Cloud Peak Energy, two of the primary producers in the basin, declined comment for this story. Both will announce their corporate earnings in the coming weeks, when they will likely face questions from financial analysts about increasing production.

Wyoming’s coal output was up slightly through the first week of April. As of April 5, the state had produced 100,706 tons, an increase of almost 0.5 percent from the same period last year, when output was 100,310 tons, according to the U.S. Energy Information Agency.

Jim Robinson, an economist for the state Department of Administration and Information, said the benefit of rising spot prices will be limited by the fact that coal companies sell much of their product through long-term contracts.

Nonetheless, he said, “I think for the coal industry that this is a healthy trend upward. That by itself is a good indicator that there is still some interest in Powder River Basin coal.”

Powder River Basin producers, which generally have lower costs than their eastern producers, are especially well-placed to benefit from the new market conditions, Cowen and Co. analyst Daniel Scott wrote in a recent research report.

Gas prices usually must be above $2.75 per million British thermal units for the basin’s coal to be competitive, Scott wrote. Gas prices have been well above that for much of the winter. Prices at Henry Hub in Oklahoma on Tuesday were $4.63 per million Btu.

Those conditions bode well for companies when they go to fill their contracts for 2015, Scott said.

“With natural gas storage at multiyear lows entering injection season, we expect the need to refill storage to be directly at odds with peak demand from the gas-fired generating fleet during the summer,” Scott wrote in comments reported by SNL Financial.

“Should weather be normal or hotter than normal, we would expect to see further improvements in coal burns and inventory levels, which would likely provide upward pressure for 2015 tonnage still open.”

Perhaps the biggest challenge for the industry remains the retirement of coal-fired power plants. The Energy Information Administration estimates that 4.7 gigawatts of coal capacity was retired nationwide in 2013. The previous year, 10.3 gigawatts of coal capacity retired.

The agency predicted that overall coal consumption will decline 2.4 percent in 2015 as a result of retirements, new environmental regulations and generation increases by renewable-power producers.

Nonetheless, the cold winter served as a reminder of the importance of coal-fired power plants to the nation’s energy portfolio, said O’Brien, the Doyle Trading Consultants president.

“No matter what is going on with the natural gas price,” O’Brien said, “you can’t substitute the reliability of having a coal stockpile sitting at your power plant ready to be converted into energy.”

Original article here.