(John Kemp is a Reuters market analyst. The views expressed are his own)
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By John Kemp
LONDON, Oct 18 (Reuters) - 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).
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 gas-fired plants.
Higher capacity factors at coal units should continue to normalise stocks and eventually ease some of the short-term pain for coal companies.
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, 2016).
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