A comeback for coal in the power generation space could come next year on the expected rise in demand for electricity and corresponding increases in natural gas prices to more normal levels, according to global coal mining equipment supplier Joy Global Inc.
The Milwaukee-based equipment manufacturer/distributor to the coal mining industry reported increased quarter-over-quarter profits in late August but described struggles for its core businesses due to low gas prices and concern that the anticipated reversal will only bring a slow recovery for the coal-fired power sector.
Noting that recent gas price rises have prompted some switching back to coal in the power sector, Joy CEO Mike Sutherlin said he sees the U.S. coal market “at the bottom, with opportunities to recover volume through return of power demand and switching back. Natural gas will continue to be a competitive fuel, and this will force U.S. coal production into lower-cost basins.”
Joy predicted a general global slowdown in growth, with the United States leading the trend. Worldwide, there have been coal production cuts, but they are most pronounced in the United States.
“Electricity demand in the U.S. was down more than 5% during the winter heating season,” exceeding a 4% decline in 2009, Joy told financial analysts.
“On top of slowing demand, shale gas production has been expanding rapidly and creating a significant surplus of natural gas in the United States,” the company said. “This has depressed natural gas prices to 10-year lows and also has increased the dispatch of gas-fired generation…As a result, coal’s share of electricity generation has dropped from 43% to 32% between 2006 and April this year, while the natural gas share has increased from 18% to 32%.”
Coal production in 2Q2012 was down by 104 million tons compared with 1Q2012 on an annualized basis, the Joy calculations showed. It is estimated that cuts of 110-120 million tons are needed to balance the U.S. market, executives said, noting that those reductions could be reduced if there is more power generation switching back from gas to coal.
With the number of active natural gas drilling rigs hitting the lowest level in August in more than decade, the prospect is for more upward movement on gas prices. At less than $4/MMBtu, prices are uneconomic for most shale gas regions, and current prices are below the cost of drilling in many areas, the Joy analysis said.
Future price strips of natural gas move above the $4 level by 2014, Joy said, and various current forecasts predict prices will approach that level a year sooner, offering some hope for the coal sector next year.
“It is believed that a significant portion of coal’s share loss to gas can be recovered as gas prices increase,” Joy said. “However, this may take a couple of years.”
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