US utility demand for coal set to increase

23 June 2014 14:44 Source:ICIS

US-based utilities have low thermal coal stockpiles after a colder-than-normal winter in the US during the end of 2013 and the first quarter of 2014 boosted coal burn and depleted stock levels, which could see US buyers turn to Colombian depending on freight costs and location.

Thermal coal inventory levels at utilities fell sharply last winter, dropping 24% between November 2013 (156m short tons) and February 2014 (119m short tons), according to the US Energy Information Administration (EIA) in a report in April.

US power generation hit record levels during the first two months of 2014 and utilities are expected to return to the US domestic or Colombian market to replenish stocks, which could increase prices for US and Colombian coal in the short term.

“Colombian steam coal could be quite competitive for US utilities,” said Michael Hsueh, commodities strategist at Deutsche Bank to ICIS on Monday.

“It all depends on delivery costs. You have to look at where the utilities are located. Also it depends on ocean freight costs and railway freight costs,” he said.

“It depends on freight rates and if it [the power plant] is close to a port that can handle a large vessels. It could be an option. Also, you have to look at whether they would be able to get the rail capacity, which has been a key problem. There has been high railway utilisation for crude oil and agriculture,” he added.

“If there is a utility that is set up to buy US coal then they could find it difficult to switch to Colombian coal. There could be operational issues around differences in calorific value or quality,” he said.

Stronger demand

Steam coal producers in the United States expect to see a rise in thermal coal sales in the second half of the year as utilities look to rebuild inventories after the freezing winter.

It is uncertain if US-based utilities will source their thermal coal requirements from domestic sources or if they will go further afield to Colombia where prices have been touted as ‘competitive’ due to lower mining costs and attractive freight rates to the US.

“The sales environment has improved materially since last year. After the polar vortex during the winter,” said Alex Rotenen, vice-president of investor relations for US-based coal producer Alpha Natural Resources.

“Power demand and hence the coal burn was significantly higher than it had been in prior months. We believe the next determinant for the thermal market will be the summer-burn season which has just begun,” he said.

US coal producer Arch Coal expects domestic coal consumption for power generation to increase more than 25m tons in 2014 compared to 2013.

“We are encouraged by the strengthening dynamics of the US thermal market,” said John Eaves, Arch’s president and CEO in an e-mail.

Even with modest supply increase, Arch expects strong reductions in utility coal stockpiles throughout the year, due to solid demand and continued higher prices for competing fuels.

The company expects US utility coal stockpiles could be below 110m tons by the end of the summer season, or nearly 30% below the 10-year average. Stacy Irish

By Stacy Irish