Low Prices aren't Helping this Region of the Country
The Powder River Basin, or PRB, is the cheapest coal region in the country. PRB players like Peabody Energy , Cloud Peak Energy , and Arch Coal are benefiting from this fact. The question, however, is if PRB coal is so cheap, why isn't it gaining market share even more quickly?
Dollars and cents
When it comes to generating electricity, cost is a big issue. That's why coal has been losing ground to natural gas. The combination of horizontal drilling and fracking has resulted in an oversupply of natural gas, driving the price down to the point where the fuel is competitive with coal. Add in environmental issues, which is a major drawback coal faces, and it can be cheaper to build and run gas powered plants.
In fact, Southern Company is one of the few companies building coal fired generating capacity right now. It is already billions of dollars over budget and shareholders are going to have to foot a good portion of the added costs. Part of the problem is that the Kemper facility is at the leading edge of clean coal technology, employing carbon capture technology on a large scale for the first time.
The first time around is always the hardest, so it's no wonder that U.S. utilities aren't lining up to build carbon capture coal plants. So Southern is on its own for now. However, there's still a lot of coal power around and demand for the dirty fuel isn't going away overnight. That's why companies like Peabody Energy, Arch Coal, and Cloud Peak Energy still have positive outlooks for the industry.
Cheap to mine
This trio is particularly interesting because they all operate in the cheapest coal region—the Powder River Basin. Cloud Peak's mines are exclusively in the region while Peabody Energy and Arch Coal both have notable, but not exclusive, exposure there. In some industries, being able to undercut on price would lead to a huge industry advantage.
But both Cloud Peak and Peabody sold less PRB coal in the third quarter than they did last year. Only Arch managed to sell more year over year. Shouldn't the cheapest coal in the country be winning more and more market share from higher cost regions like Central Appalachia? Not so fast...
Costly to ship
Location, location, location is the saying in the real estate industry, but it's just as important for coal. According to the U.S. Energy Information Association, or EIA, PRB coal can cost more to ship than to mine! The EIA estimates that transportation accounts for around 60% of PRB coal's total delivered cost. Such costs for Appalachian and Illinois Basin coal, meanwhile, can be as little as 20% of the total delivered cost.
In fact, shipping costs, or the lack thereof, are one of the reasons why Southern Company is building a coal fired plant. The mine that will supply the coal is, literally, right next door. As PRB coal proves, that alone removes a huge cost from the equation and sets Southern's Kemper facility up to provide customers with years of low-cost, and low pollution, coal power.
Avoid the PRB players?
This isn't to suggest that Cloud Peak, Peabody Energy, or Arch Coal aren't well positioned; because they are. And with natural gas starting to be tested in the railroad industry, with the help of General Electric , transportation costs could be set to come down over the next decade. GE's transportation unit CEO, Lorenzo Simonelli even stated that, "We are entering a new era where natural gas will be a major fuel." That would make PRB coal even more desirable.
Current high shipping costs, however, help explain why PRB coal isn't killing regions with notably higher costs, like Central Appalachia. That region is, indeed, loosing market share, but there isn't likely to be an overnight switch. Still, for those with a long-term perspective, big PRB miners like Arch, Cloud Peak, and Peabody still have a leg up on the competition. But keep an eye on shipping costs, just in case.
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The article Low Prices aren't Helping this Region of the Country originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Southern Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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