Coal’s Future Is Rocky at Best

Cheap, clean natural gas is quickly replacing gritty old coal | It’s “really made a mess of a lot of these business models”

Matthew Philips

40 percent of U.S. energy will come from coal this year


Is coal doomed? The dirty yet abundant energy source has had some rough patches before, but nothing like this. In 1985 coal accounted for 57 percent of all power generated in the U.S. Last year it was 42 percent. The U.S. Energy Information Administration estimates it will fall to 40 percent this year. Prices for Appalachian coal are down 24 percent over the past 12 months; for coal from the Powder River Basin in Montana and Wyoming, they’re down 45 percent. “With the prices you’re looking at now, no one can make money,” says Lucas Pipes, an analyst at Brean Murray, Carret.

Coal is in a struggle with a perfect adversary: ultracheap natural gas. With all the shale reserves unlocked by fracking, gas prices have steadily declined since mid-2008, to the point where they’re hovering around $2 per million British thermal units for the first time in a decade. That’s lower than coal prices. The natural gas is all domestically derived energy, so the country’s fuel import bill doesn’t go up. It’s clean. And it’s so abundant that the industry may run out of places to store it. Utilities that switch to natural gas are already passing savings on to customers. In 2013 residential U.S. utility bills should fall 1 percent.

With the price of natural gas around $2, everyone who can switch is switching. This year, Goldman Sachs energy analyst David Greely expects utilities to change from coal to gas at the unprecedented rate of 4.9 billion cubic feet per day. In 2008 coal made up 70 percent of Southern Co.’s electricity generation; now it’s 32 percent. At the same time, Southern has increased its gas-fired generation from 16 percent to 46 percent. Even utilities in West Virginia, the heart of coal country, are converting.

Since last April, shares of Peabody Energy, the biggest coal producer in the U.S., have dropped more than half, from $70 to $29. The stock of Arch Coal has gone from $35 to less than $10 in the same period. Several coal producers have reported losses in the hundreds of millions of dollars. “Cheap natural gas has really made a mess of a lot of these business models,” says Kuni Chen, an energy analyst at CRT Capital Group.

More trouble lies ahead. A number of old, dirty coal-fired plants are scheduled to be shut down by the end of 2014 in compliance with regulations from the Environmental Protection Agency. That could drive another 5 percent of coal demand out of the market, says Chen.

Producers have been idling mines since January. In February, Patriot Coal idled its Big Mountain mine, laying off 250 workers. The next day, Alpha Natural Resources, the biggest coal producer in West Virginia, said it would close two mines in that state and two in Kentucky, resulting in 320 layoffs. Those mines that aren’t being shut are cutting back on production and reducing worker hours and overtime. Many miners are retiring, and they’re not being replaced.

It’s all quite a turnaround from a decade ago, when the coal lobby pushed the idea that America’s energy future lay with its deep reserves of coal, the most abundant on earth. That argument is rarely heard today.

Not everyone believes coal is finished. Analysts at FBR Capital Markets, a Virginia-based investment bank, think most coal-to-gas switching has already happened, and further switching will be much harder because of logistical constraints and existing contracts. “King Coal is not so easily displaced,” says FBR analyst Marc de Croisett. Overseas customers are materializing, too: U.S. coal exports rose 57 percent from 2009 through the end of 2011. New power generation in China and India could add 300 million tons of new coal demand this year. Some of the most bullish people on coal are in the railroad business. Union Pacific Chief Executive Officer Jack Koraleski foresees a strong summer for coal shipments. “Gas plants are running flat out right now, so the growth has got to come from coal once everyone turns their air conditioners on,” he says. “Coal is far from dead.” The question is whether it’s mortally wounded.

The bottom line Coal producers are getting hammered in the stock market as lower natural gas prices cut into their industry.


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