Alpha Natural Resources (NYSE: ANR), one of the top U.S. coal producers, said in a Nov. 13 conference presentation that falling natural gas production and rising natural gas prices should bolster U.S. steam coal production and consumption.
Earlier this year, when gas prices tumbled below $2/MCF, coal fell to about 32% of U.S. power generation, down about 10% in only a year. Now, with gas production falling as gas producers shut in output to rally prices, spot gas prices are now in the mid $3/MCF range and coal’s share of U.S. power generation has climbed back up to about 39%, Alpha’s Vice President of Investor Relations, Todd Allen, noted in the presentation for the 3rd Annual Dahlman Rose & Co. Global Metals, Mining & Materials Conference. He said coal may not get back to the “heady days” when it had a 45%-50% share of generation.
Issues going forward include that U.S. coal stockpiles, at about 190 million tons as of Sept. 30, are elevated and it will take time to burn down those stocks before new coal buying begins. But Alpha noted that Powder River Basin and Northern Appalachia coals, which it produces, are competitive at current natural gas prices. PRB is competitive at $3 gas, while Northern Appalachia is competitive at about $3.50 gas.
Alpha is cutting some of its higher-cost Central Appalachia production, with the region particularly challenged by relatively high coal production costs. Also, a lot of the smaller power plants that use Central Appalachia coal got by for years with low-sulfur Central Appalachia coal and were still able to comply with SO2 emissions limits. But, with ever more stringent SO2 limits, many of those plants aren’t seen by their owners as worth the installation of new SO2 controls, Allen noted.
Low gas prices and high gas supply are not the only problems for coal. U.S. Environmental Protection Agency rules like the Cross-State Air Pollution Rule (CSAPR) and the Mercury and Air Toxic Standards (MATS) are driving many coal-fired plants out of existence. CSAPR was thrown out by a federal appeals court in August, but the court left the somewhat weaker Clean Air Interstate Rule (CAIR) in its place and power generators are still largely moving to retire coal plants as if CSAPR was still in force.
Alpha said that in the eastern U.S., 204 coal units representing over 31.1 GW of capacity have been targeted for retirement or switching to other fuels. Ohio leads that retirement parade with 30 units, followed by Pennsylvania at 22. Specific power generators aren’t mentioned in the presentation, but companies with a lot of retirements include FirstEnergy (NYSE: FE), American Electric Power (NYSE: AEP) and GenOn Energy (NYSE: GEN).
To help it deal with lower coal prices and demand, Alpha is projecting $300m to $350m of capital spending in 2013, down about $200m from 2012. Allen said the capital spending cut is aided by the fact Alpha has a lot of spare surface- and deep-mining equipment due to ongoing mine idlings, so it can redeploy the best of that equipment at the surviving mines.