Wed October 3, 2012
More Coal Production Cuts Could Be Coming, Despite Slightly Higher Gas Prices
Rising natural gas prices could mean good news for the country's coal industry...but there are still likely cuts to come in Central Appalachia. That's the gist of an article from SNL Finanacial.
Earlier this year, gas was at less than $3 per MMBtu, which some call the "sweet spot" for coal to gas switching. Any higher than $3, and it's not as cut and dry a decision to switch to natural gas. But now, gas futures for November are trading at slightly higher than that: at $3.459 per MMBtu.
Another factor in coal's favor: a hotter-than-usual summer (where everyone cranked the AC and burned lots of coal). The stockpiles of coal at power plants are getting back down to normal levels, which means some companies could start ordering more production.
But the article quotes an analyst who says, unfortunately for Central Appalachian coal producers (which includes eastern Kentucky), those factors aren't enough to jumpstart production immediately.
FBR Capital Markets analyst Mitesh Thakkar estimated that coal producers still need to cut about 40 million tons of annualized production to help balance the market and keep coal stockpiles at utilities from getting too high heading into the winter. "We could see another 10 million tons of production taken out of the market by the end of the year," he said, adding that he expected more cuts to come from Central Appalachia and that about half of those cuts would be to production of metallurgical coal, used in steel production.
But once those cuts happen, Thakkar thinks Appalachian metallurgical coal producers especially could be in a stronger position by the end of next year.