Cold Weather Draws Down Coal Inventories

The remarkably cold winter in the eastern U.S. has depleted coal supplies as demand for electricity and heat spiked. Coal-fired power plants often keep several months’ supply of coal on site in case they need to ramp up generation. The average supply of coal on hand fluctuates between 60 and 90 days’ worth of supply. But for December 2013, the average supply on hand dropped below 60 days for the first time since 2011, and for only the second time in at least five years.

Higher natural gas prices contributed to the recent resurgence in coal-fired generation. Henry Hub prices, a benchmark for natural gas, have more than doubled since the spring of 2012. More than 80% of coal is bought under multi-year contracts. This makes it difficult for utilities to quickly purchase more coal in a pinch, according to the Energy Information Administration. Still, generators can turn to the spot market for immediate purchases, which they have done at a much greater frequency over the last year.

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The drawdown in coal supplies should give a short-term boost to coal producers, as utilities scramble to replace depleted inventories. And natural gas prices are not likely to drop to their 2012 lows. On the other hand, the U.S. is emerging from the harsh winter, and mild temperatures will tamp down demand. Short-term tightness in the market still may not translate to any meaningful upside for the coal industry over the long-term. Two major coal companies, Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR), were downgraded by global investment firm Jeffries due to weak coal prices. Both companies were down in midday trading. The downgrade reflects a sense that the upside for coal producers is pretty limited, despite depleted inventories and higher natural gas prices.

By James Burgess of Oilprice.com