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Saturday, December 3, 2011

King Coal's Throne Under Threat

King Coal's Throne Under Threat - WSJ.com:

image via Bloomberg News

U.S. environmental regulations will force power plants to reduce pollution as of Jan. 1. Although the industry is waging an effort to stop the rule's implementation across 27 states, power plants already are ratcheting back purchases of thermal coal, which produces smog and soot-causing emissions as it is burned to produce electricity, in favor of cleaner fuels.

That has sent prices of thermal coal plummeting 13% on the New York Mercantile Exchange between the day the rule was announced on July 7 and last week's one-year lows. While trading is relatively thin, it is used as a proxy for the billion-dollar cash market on the East Coast, where physical coal changes hands.

Investors who want exposure to coal prices typically invest in coal-miner stocks. Some market watchers have urged investors to shift toward the types of coal used in steelmaking, known as metallurgical coal, or "met," which trade at a higher price and has more exposure to China's steel sector, an expanding market.

Although U.S. policy makers are turning away from thermal coal, which is mined in places like West Virginia and Wyoming, coal continues to hold significant sway in U.S. and global energy markets. The U.S. is home to the world's largest reserves of the fuel, and $33 billion of thermal coal is expected to be produced this year based on current market prices, according to Brean Murray, Carr an investment bank.

The gradual shift toward cleaner power, and falling coal prices, is forcing coal producers to seek markets elsewhere. That is likely to push investors toward coal companies that have access to export capacity.

Analysts and brokers see reasons for steady or higher coal prices in the form of demand from Asia; China and India are building coal-fired power plants at a furious pace. The U.S. long has been a net exporter of coal, but its share of the export market is rising as coal originally mined for domestic use is shipped abroad.

Historically, Europe has relied on South Africa for imports, but higher prices in Asia have pulled that coal away, leaving the U.S. to fill the gap.

U.S. miners have been exporting coal, including thermal coal, at a near-record pace this year. Arch Coal Inc., the No. 2 U.S. miner by production, projects that U.S. exports will reach 106 million tons this year, the highest since 1991, and could increase again in 2012 as port expansions and rail terminals are completed.

That may help bolster domestic coal prices in the long term, analysts said. As more coal heads offshore, the decline in available U.S. supply will bring prices higher, they said. And brokers said U.S. coal prices are likely to find support early next year as U.S. utilities run down coal inventories and are forced to return to the market.

Cleaner-burning natural gas, which has taken some of coal's market share in the U.S. over the years. Natural-gas prices have been in a slump for three years due to booming production. Because utilities have some ability to switch between the two, competition between the fuels keeps prices of both in check.

In the U.S., coal's market share was 51% in 2000 and 44% last year. Natural gas's share was 15% in 2000 and 24% in 2010.

The new emissions standards likely will push utilities to natural gas.  
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