Is this the beginning of the end of coal?
Arch Coal (NYSE: ACI) reported a big loss for the fourth quarter of 2013, its聽. The numbers came in lower than many analysts expected and the company continues to struggle amid declining revenues.聽 Arch聽聽a loss of $0.45 per share with revenues of $719.4 million. Part of the blame, according to Arch, was from a rail outage in the Powder River Basin and 鈥済eological鈥� problems in Appalachia, which contributed to lower revenues.
With coal demand slumping, Arch Coal鈥檚 stock price has been in freefall since 2011. It closed at $4.01 on February 3, down from the pre-recession highs of $70 per share, and even much lower than $35 per share just three years ago. Arch Coal鈥檚 struggles mirror the sector as a whole. Shale gas is increasingly the fuel of choice for utilities as they make the switch away from coal to fire their power plants. In 2013, the coal industry聽聽only 984 million tons of coal, the first time since 1993 that the industry produced less than one billion tons.聽(Related article:聽)
However, the company believes it may be poised for a bit of a comeback. Natural gas prices have more than doubled since their lows nearly two years ago and they have continued on an upward trajectory from the remarkably cold weather in the northeastern United States. Record-low temperatures have led to high demand, and Henry Hub prices have rapidly jumped above $5 per million Btu. And聽, regional natural gas prices have temporarily spiked far beyond those levels.聽
This, Arch Coal believes, will allow coal to regain lost ground. For power generation, the U.S. burned through an additional聽tons of coal in 2013 compared to 2012 as higher natural gas prices prompted a coal bounce back. Moreover, prices for metallurgical coal (used for steelmaking) may be聽听础谤肠丑听sales of metallurgical coal that were lower than even what was considered on the low end of expectations. But, the coal industry hopes that as demand catches up with supply, prices will again rise.
厂辞尘别听agree, and think that the coal industry is set for a comeback. That may be the case in the聽, but the longer-term picture is much shakier. A coal resurgence is based on the belief that the downturn over the last three years has been聽聽and if the industry can just weather the bad times, it will turn out OK. To do this, companies have reduced capital expenditures in order to straighten out their balance sheets while waiting for better days. Arch鈥檚 CEO John Eaves played down the losses and assured investors a rebound is coming, 鈥淥ur goal in 2014 will be to once again tighten our belts to reduce cash outflow further and increase operational efficiencies鈥ith signs that a rebound in U.S. thermal coal demand and pricing may be forthcoming, we are managing our operations in a manner that will enable us to benefit from that rebound as it occurs."聽(Related article:聽)
But what if the coal industry鈥檚 struggles are not cyclical, but structural? The spike in natural gas prices may be an aberration. More importantly, forthcoming regulations on toxic mercury from the Environmental Protection Agency will put dozens of coal plants out of business. The much more significant limits on greenhouse gases from existing power plants may eliminate many more. Even if Congress or a new administration delays or prevents some of these regulations, at a minimum it is unlikely that utilities and investors will finance the construction of any new coal-fired power plants in the foreseeable future. This points to a structural decline, not a cyclical one.
Original article:聽
