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http://www.businessweek.com/articles/2012-04-26/coals-future-is-rocky-at-best
Coal's Future Is Rocky at Best
By Matthew Philips April 26, 2012
Is coal doomed? The dirty yet abundant energy source has had some rough patches before, but
nothing like this. In 1985 coal accounted for 57 percent of all power generated in the U.S. Last year it
was 42 percent. The U.S. Energy Information Administration estimates it will fall to 40 percent this
year. Prices for Appalachian coal are down 24 percent over the past 12 months; for coal from the
Powder River Basin in Montana and Wyoming, theyre down 45 percent. With the prices youre
looking at now, no one can make money, says Lucas Pipes, an analyst at Brean Murray, Carret.
Coal is in a struggle with a perfect adversary: ultracheap natural gas. With all the shale reserves
unlocked by fracking, gas prices have steadily declined since mid-2008, to the point where theyre
hovering around $2 per million British thermal units for the first time in a decade. Thats lower than
coal prices. The natural gas is all domestically derived energy, so the countrys fuel import bill
doesnt go up. Its clean. And its so abundant that the industry may run out of places to store it.
Utilities that switch to natural gas are already passing savings on to customers. In 2013 residential
U.S. utility bills should fall 1 percent.
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With the price of natural gas around $2, everyone who can switch is switching. This year, Goldman
Sachs (GS) energy analyst David Greely expects utilities to change from coal to gas at the
unprecedented rate of 4.9 billion cubic feet per day. In 2008 coal made up 70 percent of Southern
Co.s (SO) electricity generation; now its 32 percent. At the same time, Southern has increased its
gas-fired generation from 16 percent to 46 percent. Even utilities in West Virginia, the heart of coal
country, are converting.
Since last April, shares of Peabody Energy (BTU), the biggest coal producer in the U.S., have
dropped more than half, from $70 to $29. The stock of Arch Coal (ACI) has gone from $35 to less
than $10 in the same period. Several coal producers have reported losses in the hundreds of millions
of dollars. Cheap natural gas has really made a mess of a lot of these business models, says Kuni
Chen, an energy analyst at CRT Capital Group.
More trouble lies ahead. A number of old, dirty coal-fired plants are scheduled to be shut down by the
end of 2014 in compliance with regulations from the Environmental Protection Agency. That could
drive another 5 percent of coal demand out of the market, says Chen.
Producers have been idling mines since January. In February, Patriot Coal (PCX) idled its Big
Mountain mine, laying off 250 workers. The next day, Alpha Natural Resources (ANR), the biggest
coal producer in West Virginia, said it would close two mines in that state and two in Kentucky,
resulting in 320 layoffs. Those mines that arent being shut are cutting back on production and
reducing worker hours and overtime. Many miners are retiring, and theyre not being replaced.
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Its all quite a turnaround from a decade ago, when the coal lobby pushed the idea that Americas
energy future lay with its deep reserves of coal, the most abundant on earth. That argument is rarely
heard today.
Not everyone believes coal is finished. Analysts at FBR Capital Markets, a Virginia-based investment
bank, think most coal-to-gas switching has already happened, and further switching will be much
harder because of logistical constraints and existing contracts. King Coal is not so easily displaced,
says FBR analyst Marc de Croisett. Overseas customers are materializing, too: U.S. coal exports rose
57 percent from 2009 through the end of 2011. New power generation in China and India could add
300 million tons of new coal demand this year. Some of the most bullish people on coal are in the
railroad business. Union Pacific (UNP) Chief Executive Officer Jack Koraleski foresees a strong
summer for coal shipments. Gas plants are running flat out right now, so the growth has got to come
from coal once everyone turns their air conditioners on, he says. Coal is far from dead. The
question is whether its mortally wounded.
The bottom line: Coal producers are getting hammered in the stock market as lower natural gas
prices cut into their industry.
Philips is an associate editor for Bloomberg Businessweek in New York. Follow him on Twitter
@matthewaphilips.
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