Christmas Time was Good to Coal Companies but Will it Continue?

Christmas Time was Good to Coal Companies but Will it Continue?

To say that coal suffered in 2013 would be an understatement. The collapse in its usage in the United States brought some coal companies to the brink of bankruptcy. Many coal companies are resorting to cost reductions and asset sales to raise cash to keep their businesses afloat, but they need more if a true turnaround is to materialize.

Such catalysts may present themselves in the forms of rising natural-gas prices, as well as exciting coal-burning technological advancements. While it's still premature to declare coal fully back to health in the United States, some favorable trends are emerging.

Natural gas prices on the rise
Perhaps the biggest contributor to a coal comeback is that the economics of natural gas usage may actually become unfavorable. Natural-gas prices are rising in the United States. The supply glut that had previously kept the price of natural gas down has now been met by surging demand. This has resulted in normalized pricing of natural gas, and should the rally continue, may actually work in coal's favor.

Consider that natural gas recently touched $4.50 at the New York Mercantile Exchange, which represents a significant increase over the past several months. While this is a boon for natural-gas producers, it's a source of pain for end users, including utilities, many of which made switching from coal to natural gas a strategic priority.

This couldn't come at a better time for coal producers such as Alpha Natural Resources and CONSOL Energy . Alpha Natural has had a terrible fiscal 2013 so far, seeing deteriorating metrics across the board. Shipment volumes and price realizations are both down significantly. Alpha Natural's coal margin dropped from 15% through the first three quarters of 2012 to 9% in the same period this year. Shipment volumes through the first nine months totaled 66 million tons, down sharply from 83 million tons last year.

CONSOL Energy is in an interesting position since it just started transitioning itself away from coal and toward natural-gas production. CONSOL sold $3.5 billion worth of coal mines recently, and it will use the proceeds in an effort to reach its stated goal of 30% annual gas production growth in 2015 and 2016. Should industrial users shy away from natural gas, CONSOL might find itself in the wrong place at the wrong time.

Will utility customers return to coal?
Despite the political unpopularity of coal, utility customers might have no choice but to return to coal should the economics of natural gas continue to worsen. Some utilities, including Southern Company , are committed to keeping coal a part of their power mix. Southern is devoting a huge amount of resources to building a new coal-powered facility that utilizes coal in a cleaner fashion than ever before. The move might prove to be extremely shrewd given the stunning rally in natural gas.

Southern's Kemper facility might just be the future of coal. Due to stricter regulatory oversight of coal, it's extremely difficult for any utility to build new coal-burning facilities. Thanks to advanced technological solutions, such as those employed at the Kemper plant, coal might just have a chance to retain a major role in the United States energy mix.

That's because the Kemper facility uses a form of coal known as lignite, which converts to gas at a much lower temperature (and cost) than existing gasification methods. This means more power production at significantly lower costs, all with a much more favorable environmental impact.

Don't call it a coal comeback (yet)
Coal has some significant tailwinds heading into the new year, but it's still too early to declare success. Natural gas is plentiful in the United States, and for most of 2013, was very cheap. That may change next year as demand soars, and natural-gas prices are already beginning to reflect this. Should the natural-gas rally continue, more utilities may switch back to coal.

Coal's investment case would be furthered by technological advancements that may allow for cheaper, cleaner burning of coal. Should these factors combine, we just might see a coal comeback in 2014.

What has domestic coal fallen victim to?
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Originally published