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However, the data show that the largest declines took place for coal deliveries priced below $2.00 per MMBtu. Clearly, this is not a reflection of coal-to-gas displacement dynamics. Rather, it is a reflection of struc..

02 May 2013

Commodity Online
Delivered coal prices appear to be exceptionally resilient to the drop in consumption. In fact, while delivered coal volumes have been declining, delivered coal prices have been rising, Barclays noted in a report.

One might expect coal deliveries priced at $3.00 per MMBtu equivalent or more to drop the most as coal-to-gas displacement eats into the coal supply stack.

However, the data show that the largest declines took place for coal deliveries priced below $2.00 per MMBtu. Clearly, this is not a reflection of coal-to-gas displacement dynamics. Rather, it is a reflection of structural coal price trends.

In 2012, despite drops in deliveries of all coal types except for Illinois Basin, only Northern Appalachia and Southern Wyoming coals had price declines. The coal supply curves for Central Appalachia, Northern Appalachia and Southern Powder River Basin all shifted left from 2011 to 2012, indicating that lower volumes were delivered at similar prices from one year to next.

The supply curve for Illinois Basin coals changed little in the same period, largely because these are beneficiaries of utilities actively seeking to lower costs by shifting to a cheaper coal grade, a dynamic that has apparently offset any effect of coal-to-gas displacement for Illinois Basin coal.

Even with a 4% increase in delivered Illinois Basin coal prices in 2012, it remained 30% cheaper on an MMBtu/equivalent basis than Central Appalachian coal.

“In aggregate, the y/y drop in coal shipments of 6.4 Bcf/d equivalent exceeds our power model’s implied coal-to-gas displacement significantly: we estimate coal-to-gas displacement to have averaged 6.4 Bcf/d in 2012 (versus a baseline of 2008 before the debut of the coal displacement dynamic), up 3.4 Bcf/d from 2011 levels,” Barclays said in the report.

Certainly, the entire drop in shipments cannot be attributed to displacement by gas: total power loads pulled back in 2012, and so should have coal-fired generation. Still, the magnitude of the drop suggests that the actuallevel of coal-to-gas displacement was at least as large, or in fact may have been larger, than our power models imply.

While the data on coal shipments show how much coal remains to be displaced by gas at a given gas price level (theoretically, without considering operational constraints), it does not provide a perspective on how much the coal burn could increase as coal-fired units become economical.

Previous years represent a comparison; although not entirely due to displacement, the amount of shipments lost could be fully restored if demand and fuel economics dictate. In this context, given current gas prices, the return of Powder River Basin coal-fired generation to 2011 levels (when Powder River Basin coal was not displaced) could be providing a boost of 2.2 Bcf/d gas equivalent to coal consumption versus last year’s levels and triggering a commensurate drop in gas demand.

Similarly, in a return to 2011 coal generation scenario, Appalachian coals (including Central, Northern and Southern) could grow 3.4 Bcf/d versus last year.

The analysis of coal shipments broadly confirms the results of our power models, and suggests that there is a large amount of coal demand to be gained and gas demand to be lost as gas prices strengthen.

“We believe that the full effect of prices recovering from the Q1 average of $3.48 to the current levels of $4.26 for Q2 and $4.42 for Q3 on coal-to-gas displacement has not yet been felt in the balances. While coal displacement responds to prices, it does so with a slight lag, in our view. If temperatures average in line with historical norms for the rest of the injection season, current forward prices may have run ahead of fundamentals,” Barclays noted.


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