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Have US Coal Prices Bottomed?

By Hadaf Zubi | Sat, 24 November 2012 00:00 | 0

Definitely maybe. While the jury’s still out on the Uinta Basin, prices for Appalachian and Illinois/Powder River Basin coal look to have begun recovering after dropping to long-term support levels following the achievement of post-2009 highs in October 2011. The interesting point about this price movement is that of the 5 major US coal categories, all but Uinta basin coal have set 2012 lows that are higher than their 2009 lows.  

Historic Coal Prices by Region

None of this indicates that coal prices can’t go lower in the future, but recent price action is accompanied by fundamental support that would suggest some price stability or appreciation in the future. Firstly, US coal production has declined 5.4% in the past 52 weeks, which has helped to stabilise prices through reduction of supply. Coal stocks, which began to decline in Q2 2009, rose more than 15% from Q3 to Q4 2011. This oversupply contributed to price weakness in the first quarter of 2012, but from Q1 to Q2 2012 stocks have only risen 0.78%. Exacerbating the effect of oversupply on price was the fact that natural gas prices, a substitute for coal in many cases, dropped 57% in the five quarters from January 2011 to April 2012. Natural gas is 19% higher than it was in April, and producer shut-ins and seasonality have made a return to $2 very unlikely in the near-term.  

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Total domestic coal consumption in the USA is projected by the EIA to be 11% lower in 2012 from 2011, and to increase 6% from 2012 to 2013. This would suggest that lower domestic demand has largely already been priced-in. Finally, the NOAA is forecasting 3806 heating degree days in 2012. When compared with 4238 in 2011 (10% lower) or the projected 4341 in 2013 (14% year-over-year gain), climate conditions seem favourable for coal price support purely in the form of increased domestic demand moving forward. Even if coal exports (a bit over 12% of annual production) remain static in 2013, domestic demand should support prices.  

By. Hadaf Zubi

About the author

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Hadaf Zubi
Company: Liquid Capital Corp

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