If it weren't for the export market, U.S.-based coal producers would be in dire straits these days. Natural gas has put the fuel on the back burner because natural gas is both cheaper and greener. However, when listening to the management teams of America's largest coal producers they'd have investors believe that coal is about to start mounting a comeback on its home turf.
Believe it or not, coal consumption has actually been on the rise this year. According to Peabody Energy (OTC:BTU) CEO Gregory Boyce, year-to-date coal generation is up 11% as coal has begun to take back some ground from natural gas. This is because the price of natural gas is up some 50% from last year, which has caused natural gas generation to fall 15% year to date. However, instead of buying more coal, utilities are simply burning down coal stockpiles, which is why industry shipments are actually down 5%. Today, stock piles are down well below the five-year average:
However, according to coal industry executives, that actually speaks of good things to come. John Eaves, the CEO of Arch Coal (NYSE: ACI), recently said that this could mean the industry is in the early stages of a multi-year recovery. In fact he sees the trend to be a "significant turnaround from where we were just a year ago and is leading to increased customer interest in securing tonnage." Further, because his company has been conscientious to cut costs it will enable Arch to capture upside as both demand and pricing improves.
This same theme was evident on CONSOL Energy's (NYSE:CNX) recent quarterly earnings conference call. CFO David Khani noted that one of the key themes the company is seeing is solid domestic thermal coal demand. He noted that the inventory levels of its customers continue to decline and stood at an average of 39 days. That's well below the five year average of 52 days. Further, the company's own inventory levels are expected to fall to about 900,000 tons, which is well below last year's 2.3 million tons.
At some point these utilities will need to restock these coal stockpiles. When that begins to happen it should lead to higher coal prices as coal producers have been pretty aggressive in cutting production. For example, Alpha Natural Resources (NYSE: ANR) has taken a number of actions to rightsize its production footprint, including cutting production in its central Appalachian mines by more than half. The goal has been to reduce its production costs to get its business more in line with current market conditions. However, with so much coal production being shuttered over the past few years, it does leave the market open for higher pricing down the road.
This means producers could see a nice second-half recovery if utilities decide it's time to restock. The likely outcome would see an increase in both volumes and pricing, both of which would pad the bottom line for producers. It appears that while coal producers are down, the game isn't over just yet.