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US coal fundamentals weak, natural gas demand to increase in 2015: Barclays


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Investment bank Barclays Tuesday said most market participants believe it will be another year before any improvement is seen in the seaborne metallurgical coal market, while the bank expects US natural gas demand to pick up "significantly" in 2015 as a number of coal-fired power plants are shuttered.

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Barclays detailed its near-term outlook for the US coal and natural gas markets in its Global Energy Outlook for August.

Fixed income analyst Matthew Vittorioso said US coal companies are a challenging place to find value due in part to weak met and thermal coal prices.

"The spot price for top quality metallurgical (met) coal has been stuck down at $110-115/[mt] for a couple of quarters now and most market participants think it will be another year before things start to improve," Vittorioso said.

He also noted many of the US coal producers covered in the high-yield fixed-income sector borrowed in significant amounts in 2011 to gain or increase exposure to met coal. This proved to have been ill-timed, however, as market conditions have since deteriorated sharply.

"At that time, top quality met coal had peaked at more than $300/[mt] and was consistently selling for more than $250/[mt]," Vittorioso said. "However, the conditions that allowed met coal to spike to those prices (strained supply from Australia and strong demand from Asia, and specifically China) have changed, leading to a meaningful drop in the benchmark met coal price to $111/[mt] spot, and $120/[mt] quarterly."

In the US thermal coal market, Vittorioso said there had been some optimism about thermal coal prices earlier in the year, most notably around Powder River Basin coal prices, as both utility and coal production had declined.

However, over the past couple of months, PRB coal prices have retraced first quarter gains due to cheaper natural gas, weak electricity demand and transportation issues, Vittorioso added.


Separately, Barclays analysts from its natural gas team said demand growth in 2015 should be driven by the electricity and industrial sectors, offsetting expected declines in residential and commercial demand.

By far the largest demand growth factor in 2015 is the increase in underlying power demand since a large slew of coal-fired plants are due to retire as a result of upcoming environmental regulations, the analysts said.

According to Barclays, from a peak of 57% in 1988, coal generation as a percentage of total hit 37% in 2012, with many of the coal plants that have remained in operation severely underused.

"The country's coal fleet is about to be hit by another round of cuts, and this time much more permanent," Barclays said, referring to the Environmental Protection Agency's Mercury and Air Toxics Standards Act/Hazardous Air Pollutant Rule, scheduled to come into effect in April 2015.

Barclays estimates that 45 GW of coal-fired capacity is set for retirement from 2015-2017 due to the upcoming MATS rule, including 30 GW in 2015. Overall, Barclays expects gas demand for power generation in 2015 to increase by an average of 1.66 Bcf/d.

Industrial demand is expected to grow at an annual rate of 570,000 Mcf/d in 2015.

--Charlie Noh,
--Edited by Kevin Saville,