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Will Utilities Flock to Restock Coal Inventories?

Mayur Sontakke, FRM

Natural Gas Beats Coal for the Second Time in History

(Continued from Prior Part)

Coal inventories

In its September 28 report, the EIA (U.S. Energy Information Administration) published data that specified coal inventories with utilities at the end of July 2015. Warmer weather across the United States led to a fall in coal inventories at power plants as utilities burned more coal to meet the electricity demand for cooling.

Bituminous coal inventories with power plants in the United States dropped to 57.6 million tons, or 77 days of burn, at the end of July 2015. This compares to 62.0 million tons, or 73 days of burn, at the end of May 2015. However, bituminous coal inventories were substantially higher than the 49.3 million tons, or 59 days of burn, at the end of July 2014.

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Sub-bituminous coal inventories saw a drop to 75.1 million tons, or 66 days of burn, at the end of July 2015. This compares to 78.7 million tons, or 65 days of burn, at the end of June 2015.

Why it matters

Coal inventories indicate coal demand in the near future. Coal-fired power plants burn coal almost continuously, only taking breaks during plant maintenance. The process of extracting and transporting coal also takes time, so utilities tend to stock up on coal in advance in order to avoid disruptions.

Utilities order fresh shipments of coal when inventories reach certain levels. The EIA publishes coal inventory data monthly, and analyzing the data from these reports provides key insights into coal demand in the near future.

Lower coal inventory at power plants is generally positive for coal (KOL) producers such as Peabody Energy (BTU), Cloud Peak Energy (CLD), Alliance Resource Partners (ARLP), and Arch Coal (ACI). This is because these companies can expect demand from utilities that are restocking coal.

But in the current low natural gas price environment, utilities will likely switch to natural gas, which will put the expected demand for coal restocking at risk. Moreover, retirement of coal plants due to Mercury and Air Toxics Standards (or MATS) is expected to hamper demand for coal.

Continue to Next Part

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