The U.S. thermal coal market is starting to improve. A big part of that was the cold winter, which, according to the U.S. Energy Information Administration (EIA), led to a year-over-over increase in electricity demand of over 5%. Nearly 60% of that increase was sated with coal power.
After a couple of relatively warm winters, the amount of coal sitting unused at power plants was at historically high levels. That came about because of a combination of weather and historically low natural gas prices. So there was less need for power and a cheaper alternative to coal.
Natural gas prices have since risen and the cold winter led to a massive 24% drop in coal stockpiles between November 2013 and February 2014. According to the EIA, stockpiles are at "the lowest level since March 2006." And this is where it gets interesting.
The cold weather also drew down natural gas inventories, which are sitting at 11-year lows. That, in turn, is expected to keep gas prices "in the low $4 per million British thermal unit (MMBtu) range over the summer, a level high enough to limit the growth of natural gas use in the electric power sector."
In fact, the cold winter led to record prices for natural gas in some regions. For example in early February, natural gas cost 50% more year over year in New England. Imagine what that does to a customer's electric bill!
More coal demand
The tough winter is starting to make investments like Southern Company's (NYSE:SO) Kemper coal plant look a little more enticing. This plant will use the latest clean coal technology and makes use of carbon capture. It will be among the cleanest coal plants once it's built.
Southern has caught a lot of heat over the plant, the first of its kind, because of delays and cost overruns. In fact, according to Southern, "full year 2013 [results] include after-tax charges totaling $729 million, or 83 cents per share-related to increased cost estimates for construction of the Kemper project." It's understandable that investors would be upset by anything that led to a 30% year-over-year drop in earnings.
However, Southern has been increasing its exposure to natural gas for years and that fuel now accounts for over 40% of its generating capacity. Imagine if gas prices jumped 50% where Southern operates; Kemper will give it the flexibility to choose the cheapest fuel.
All coal isn't created equal, however, which begs the question of what coal is best. One region that's seen notable increased demand in recent years is the Illinois Basin (ILB). There are a number of large miners in the region, but the purest play in the ILB is Alliance Resource Partners (NASDAQ:ARLP). Ten of the company's 14 mines are in the ILB.
And, according to Alliance, ILB coal is price competitive with natural gas in the $3 to $3.50 per thousand BTU price range. The EIA expects prices above $4 -- advantage coal. In fact, while coal miners throughout the industry have been suffering, Alliance has been putting up year after year of record results. Last year was number 13. And if the first quarter is any indication, this year will be number 14.
That's because of another industry trend. Not only is ILB coal price competitive with gas right now, but ILB coal is also relatively cheap compared to Central Appalachian (CAPP) coal. So Alliance has been gaining market share from competitors in the CAPP region as utilities switch from CAPP coal to ILB coal.
Don't count coal out
Although Alliance projects growth to slow from last year's levels, it's still one of the best positioned coal miners in the industry. And this past winter shows that coal is far from dead. In fact, if gas prices increase too much, look for more utilities to follow Southern's lead by sticking with coal.