(John Kemp is a Reuters market analyst. The views expressed are
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By John Kemp
LONDON, Oct 18 U.S. coal producers have been
struck by a range of structural and cyclical factors that hit
consumption hard and forced many of them to seek bankruptcy
protection during 2015 and 2016.
The problem of excess coal production and stocks built up
gradually throughout 2014 and 2015 but the warm winter of
2015/16 pushed the industry into a crisis (tmsnrt.rs/2eBuV6w).
Coal-fired power generation slumped by almost 23 percent
during the winter of 2015/16 compared with winter 2014/15 while
gas-fired generation fell only 12 percent.
The backdrop to the industry's problems is concern about
climate change and toxic emissions from coal-fired power plants,
which is producing a structural shift away from coal combustion.
The federal government has promulgated a series of
regulations to reduce carbon dioxide emissions and toxic air
pollution that has resulted in the closure of many older and
less efficient coal-fired power plants.
The number of operational coal-fired power plants has halved
from around 600 in 2010 to just over 300 in 2016 ("Electric
Power Monthly", Energy Information Administration, Sep 2016).
And the amount of electricity generated from coal has fallen
by almost 37 percent from 1,087 terawatt-hours in January-July
2010 to 686 terawatt-hours in the first seven months of 2016.
Coal has also fallen victim to the shale revolution, which
unlocked an enormous quantity of cheap natural gas from
previously impermeable rock formations, offering a cleaner and
more flexible fuel for power producers.
Generation from gas has surged by 45 percent from 546
terawatt-hours in the first seven months of 2010 to 808
terawatt-hours in January-July 2016.
Shale has played an essential role accelerating the shift
from coal to gas, and cutting emissions of both carbon dioxide
and air pollutants from power plants.
In addition to structural factors, coal producers were hit
by the warmest winter on record in 2015/16, which sharpened
gas-on-coal competition, with coal the biggest loser (tmsnrt.rs/2ehrWvH).
U.S. natural gas prices fell to their lowest for more than
15 years earlier in 2016 as the markets struggled to clear an
oversupply of both gas and coal, but coal markets ultimately
fared worse in volume terms.
Coal-fired power plants were left unlit much of the time
last winter while electricity producers fired up gas-fired
plants especially highly-efficient combined cycle units.
In February 2016, coal units produced just 48 percent of
their maximum electrical output, down from 65 percent in
February 2015 (tmsnrt.rs/2eBtRzg).
By contrast, combined-cycle natural gas units produced
almost 54 percent of their rated output, slightly up from 53
percent the year before.
The result was an enormous build up of coal stocks at power
plants. Power producers had 189 million short tons of coal in
their stockyards at the end of February 2016, a record for the
time of year.
Coal stocks were up sharply from 150 million tons in
February 2015 and 120 million in February 2014 (tmsnrt.rs/2eBwYaD).
CAPACITY FACTORS RISE
There are now indications coal stocks are rebalancing as gas
prices rise and power producers run coal plants for more hours.
Coal stocks at power plants had declined to 172 million
short tons at the end of July, still high but below previous
seasonal peaks of 184 million tons in July 2014 and 194 million
tons in July 2009 (tmsnrt.rs/2eBvlto).
The winter of 2016/17 is likely to be colder than the record
warm winter of 2015/16 (though still warmer than average) which
should increase demand for both coal and gas.
With natural gas prices now rising, coal will be the
principal beneficiary, and coal consumption should rise during
the winter and into the first half of 2017.
Power producers are likely to run their coal units for more
hours during winter and through 2017 while reducing rates on
Higher capacity factors at coal units should continue to
normalise stocks and eventually ease some of the short-term pain
for coal companies.
BACK ON THE RAILROADS, BOOSTING DIESEL
Coal market rebalancing will have ripple effects throughout
the supply chain, especially on railroads and the diesel market.
Coal is the single most important commodity hauled by the
railroads, which are in turn one of the largest consumers of
distillate fuel oil.
Coal accounted for about a third of the tonnage hauled by
the major railroads and 18 percent of their revenues in 2014
("Summary statistics report", Surface Transportation Board,
The coal crisis has therefore produced a slump for the
railroad industry as power producers' stockyards have filled up
and they cut new deliveries.
In the first 40 weeks, the major U.S. railroads hauled just
over 3 million carloads of coal, compared with more than 4
million carloads in the same period in 2015.
The 25 percent decline in coal traffic has been the single
most important contributor to the 7 percent downturn in all rail
shipments so far in 2016 ("Weekly traffic report", Association
of American Railroads, Oct 8).
As the U.S. coal market rebalances, traffic should stabilise
and increase next year, though volumes are unlikely to recover
fully, given the structural decline in coal-fired power.
The projected increase in coal movements, coupled with an
increase in oil and gas drilling, a general improvement in
freight shipments, and colder weather, should all boost diesel
demand in 2017.
The U.S. Energy Information Administration is forecasting
distillate fuel oil consumption will rise by 130,000 barrels per
day in 2017, after declining by 180,000 in 2016 ("Short-Term
Energy Outlook", EIA, Oct 2016).
(Editing by William Hardy)