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Natural Gas Said to Dethrone Coal

After hundreds of years of being the dominant source for electrical power generation, commodity analysts said the coal industry faces an uncertain future as natural gas prices remain low and utilities build new power plants fueled by natural gas.

In its weekly report released July 13, analysts at Bank of America and Merrill Lynch & Co. said global prices for coal fell to their lowest in two years, driven in part since April by a global economic slowdown but coupled with high supplies. The analysts found that as a result, U.S. coal exports, especially to Europe and Asia, have been strong. Exports totaled 11.3 million metric tons in April.

"Of course, U.S. exports have been supported by high U.S. coal inventories and low domestic natural gas prices, both of which have resulted in greater coal-to-gas switching," the analysts said. "Without much of a recovery expected in U.S. natural gas this year barring the recent rally in U.S. Henry Hub natural gas prices, we expect coal exports to remain elevated through the remainder of the year."

The analysts added that coal exporters face a "double whammy," as the currencies of some coal exporting countries appreciate relative to the U.S. dollar (USD), which in turn has exacerbated domestic coal prices in several countries, including Russia, South Africa and Canada.

"As a result, some companies have started to cut production. In the U.S., about 20% are currently not making money," the analysts said, segueing into Arch Coal Inc.'s decision to cut output by 3 million metric tons from its mines in eastern Kentucky, Virginia and West Virginia, and Alpha Resources Inc.'s plans to close four mines in eastern Kentucky.

Patriot Coal Corp. and nearly 100 of its affiliates filed for Chapter 11 bankruptcy protection on July 9, one day before the U.S. Energy Information Administration (EIA) predicted that natural gas consumption by power generators would increase 21% this year, as utilities take advantage of the savings from buying natural gas over instead of coal (see NGI, July 16).

In mid JulyStandard & Poor's Ratings Services (S&P) warned that power generators would pay some of the highest credit spreads among U.S. corporate bond issuers, citing the low price and abundance of natural gas, especially from shale. Those findings were published in a report, "Record Low Gas Prices Are Punishing U.S. Merchant Power Producers In The Bond Market," released on the RatingsDirect website.

"The boom in shale gas has driven down natural gas prices and the cost of gas-fired electricity," S&P said in a written statement. "That has lowered the marginal price of electricity, which means merchant power plants, particularly those that run on coal, are generating less cash as their margins are being squeezed. Credit spreads have moved into the distressed space, and bond yields now exceed 10% for speculative-grade borrowers.

"[We don't] expect this situation to change soon, as reflected in our ratings on merchant power producers, which are at the bottom of the rating scale. And because many of these non-utility power generators have negative outlooks, their ratings could fall further."

The EIA reported in April that for the first time since it began keeping track, natural gas held the same share of national power generation as coal, both at 32% (see NGI, July 2). The EIA said the average spot price of Henry Hub natural gas on a megawatt hour basis was $17.80/MWh in April, compared to an average spot price of $30.76/MWh for Central Appalachian coal.

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