A Cold Winter Could Be Just What the Canary Ordered
The United States is in the midst of a severe cold snap, otherwise known as a "polar vortex", that is disrupting the normal operation of everything from highways to coal mines. At the same time, the cold is increasing the demand for electric power. While you may hate this weather, it's good news for coal.
Dealing with a threat
U.S. coal producers have been dealing with a pair of key issues. The first, is increasingly stringent government regulation that's causing a shift toward alternative fuel options like natural gas. The second, has been historically low natural gas prices, which make switching to the fuel both environmentally and financially desirable.
Although regulations appear set to get even more stiff, natural gas prices actually rose in 2013. That led utilities to shift back toward coal to keep costs in check. However, utilities haven't started to order new coal in a meaningful way because they are generally burning what they have on hand. So stockpiles of coal have been declining, falling nearly 9% between the second and third quarters alone.
That's a good trend for coal. Although the long-term shift toward natural gas likely means stockpiles don't need to be as high as they have been historically, declining stockpiles mean the market is getting ever closer to a new equilibrium. At that point, coal pricing and demand should firm.
That's why the cold spell is such a good thing. For example, utility Vectren has halted production at three of its owned coal mines. Other miners have also been affected. Although Vectren's stoppage was only expected to last a day or so, any loss of production means more coal is coming out of the utility's stockpiles.
And the impact will be magnified because the cold spell is also increasing demand for electricity. Some utility regions are worried about having enough power to meet demand. Vectren had already experienced a 30% increase in heating degree days in December. Moreover, natural gas prices in some markets have spiked, which makes increasing coal burn even more desirable for utilities in those regions.
While giant coal miner Peabody Energy didn't follow Vectren's coal lead, that doesn't mean that miners that maintained operations will feel no impact from the cold weather. That's because the weather has caused transportation to become difficult, if not impossible, as it has passed through the country. When highways and railways experience slowdowns or shut, miners like Peabody can't ship coal and supply is constrained even further.
Not the only industry
And coal isn't the only industry feeling the pinch. For example, steel industry watcher Platts is reporting that scrap steel prices could rise because of the cold snap for very similar reasons. That's a double-edged sword, however. It will crimp margins at big scrap users like Nucor , but it will also help steel companies raise their own pricing.
And that's not nearly as bad as the pain that JetBlue and other airlines are going through. The cold snap is compounding the impact of delays caused by heavy snow less than a week ago. Even ExxonMobil reported disruptions to its normal operations because of the cold.
JetBlue and other public facing companies will work through their problems, though costs may be elevated for a short period. That could make the first quarter a little lighter than first expected. The same will be true of ExxonMobil and other refiners that have been struggling with the cold. However, coal could actually wind up a long-term winner.
While Peabody and other miners may not sell as much coal as expected in the first quarter, those shipments are likely to be made up through the year. It's a lot harder for JetBlue and Exxon to recoup their extra costs. And if increased coal usage because of the cold weather mixes with reduced supply to speed up stockpile depletion at utilities like Vectren, the entire coal industry benefits.
The best part is that expectations for coal are so low right now, that a tough first quarter, led by cold snap disruptions, probably won't phase investors that much, even as it helps to speed an eventual recovery. If you own coal stocks, pray for more cold weather!
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The article A Cold Winter Could Be Just What the Canary Ordered originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Nucor. 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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