According to The Energy Information Administration, U.S. coal consumption this year will fall to a 25-year low as industries will favor the use of cheap natural gas for their energy needs. In its May short-term outlook, the EIA said it expects U.S. industries to consume 876 million short tons of coal this year, and 890 million tons in 2013. If the 2012 estimate is accurate, it will be the lowest amount of coal consumed by the United States since 1987.
U.S. natural gas prices have tumbled, this spring touching a series of 10-year lows as a result of a massive supply glut as drillers tap the gas held in shale rock formations. Gas output in the lower 48 states has grown greatly because of hydraulic fracturing, or fracking, and other improved drilling techniques that make it economic to extract fossil fuels from shale rock like the Marcellus in the U.S. Northeast. Drilling in oil-rich reserves, such as in North Dakota and Texas, often also yield gas.
The low price of gas, combined with increased environmental regulations on coal is driving the electric utilities to increase their natural-gas fired turbines at the expense of coal. The majority of coal production is consumed by electric power production.
Gas consumption averaged 5 billion cubic feet higher at power plants this year through April 10 compared to year-ago levels, according to Credit Suisse’s. The company also claims that the increase in gas consumption will will ultimately slow to an average of 3 billion cubic feet a day this year as generators manage abundant inventories of both coal and natural gas. To make a dent in gas inventories, the power industry will need to burn at least 4.5 billion cubic feet more per day on average for the year above 2011 levels, according to data compiled by Bloomberg New Energy Finance.
Cheap gas, rather than helping power producers like Southern and Exelon Corp., undercuts their revenue because it drives down wholesale electricity prices, squeezing margins for plants that run on nuclear, renewable and coal power. The utilities, for many reasons, are close to their limit of shifting the mix toward gas.
Companies such as Duke, Dominion and Southern already had been increasing their reliance on natural gas in anticipation of tougher federal pollution standards and as gas prices began falling from a three-year peak on July 2, 2008 of $13.69 per million British thermal units.
In the meantime, the losers in this development have been the companies involved in the coal industry. Coal industry companies are trading at or near 52-week lows, and the Dow Jones U.S. Coal Index down about 57% over the past year, we ask ourselves whether it is a buying opportunity. Will the decline in profits bottom out in the near future? If so, then this may be the time to step in and patiently wait for export-driven profits.
Here is some U.S. coal companies to consider as investments:
Patriot Coal Corp. (NYSE:PCX)
Alpha Natural Resources (NYSE:ANR)
CONSOL Energy (NYSE:CNX)
Alliance Resource Partners (NASDAQ:ARLP)
Rhino Resource Partners (NYSE:RNO)
James River Coal (NASDAQ:JRCC)