DTC Blog
DTC's blog highlights pertinent industry observations and color from the many U.S. and global coal and energy conferences we attend throughout the year. These events provide us with the opportunity to gather first hand market data only available right here.
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TUESDAY, February 21, 2012
Dianna Ridgway, the heart and soul of DTC, has started her maternity leave and is expecting her second baby in the second half of March. Dianna looks incredibly healthy and, in all honesty, we think Steve put on more weight during her pregnancy than she.  Dianna, Gilbert and DTC's ‘mascot’ Alejandro are relocating to Las Cruces, New Mexico to be near Gilbert’s extended family. The good news is that Dianna will continue to work for DTC, but for some reason the daily 1,200 mile round-trip commute was too much for her to consider working out of the Grand Junction office. Jim Dillon, DTC's Vice President of Research has taken the day-to-day reins from Dianna and will assume responsibilities for managing the Grand Junction office, in addition to publishing DTC's research products. Dianna holds the distinction of being DTC's first employee (2003) and has had a role in developing practically everything that our clients receive. Needless to say, we are currently beside ourselves at Dianna’s physical absence in the office, but are happy for Dianna and her family (and selfishly happy for us that Dianna will continue to work for DTC).
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MONDAY, February 6, 2012
We published a report Feb-3-2012 titled, “Coal-to-Gas Switching in Sub-$3.00/mmBtu World: What’s Next” where we discuss the impact that coal-to-gas switching has had, and we believe will have, on the utility and coalco sectors. EIA generation data from Nov-2011 sent a strong message about generation economics – coal-fired gen declined 10.4% YOY while gas fired gen increased 9.3%. And, things have gotten worse since. In Jan-2012, natural gas prices averaged $2.70/mmBtu, down about 17% from Nov-2011.
We believe the impacts of coal-to-gas switching are going to get worse before they get better. Utilities are already approaching their coal suppliers to “amend and extend” their existing coal contracts, and there are reports that utilities are already re-selling inventory at below-market prices – marketers have been at this for some time already. Not surprisingly, coalco’s are beginning to announce production cut-backs – we believe 20 – 25 million tons on an annualized basis can come out of CAPP alone in 2012, and 30 – 50 million tons in total.
Utilities and coalco’s are clearly feeling the impacts, and there have been significant behavioral changes. We outline some important caveats and sector impacts that we believe will influence coalco and utility decision-making over the next 6-12 months. We suggest you buckle up your chin strap. This will have to play itself out, and it will take at least through mid-year 2012 for that to occur.
If you would like a copy of our report, please contact me at
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, or contact Vicky Reece, our Director or Client Services, at
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.
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TUESDAY, January 31, 2012
DTC’s coverage of quarterly coalco production, as reported to the government, is unmatched. Our mine-by-mine searches and analysis of quarterly figures reported to MSHA (Mine Safety and Health Administration) by the major publically traded coal companies (ARLP, ANR, ACI, CLF, CLD, CNX, JRCC, PCX, BTU and WLT), gives our clients a ‘leg up’ during earnings season. This information is invaluable, and we are often able to recognize when a producer is experiencing production (and cost) issues before they release their quarterly earnings.
We completed our quarterly searches last Friday (January 27th) and below are a few ‘big picture’ takeaways for Q4 and 2011. (If you’d like a sample of our weekly report that includes much more company specific color, please contact
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).
- More than half of the public coalcos realized yoy production gains in Q4 2011. (ARLP, CLD, CLF, JRCC, PCX and BTU)
- More than half of the public coalcos realized 2011 yoy gains. (ARLP, CLD, CLF, CNX, PCX and BTU)
- When broken out regionally, only Napp and AL failed to improve yoy for Q4 2011 (down 4.13% and 17.73% respectively.)
- When broken out regionally for the full year, Capp and PRB fell yoy (down 24.15% and 0.48% respectively)
- When looked at on a “total” basis, Q4 2011 is up 2.32% vs Q4 2010 and 2011 is down 4.30% over 2010.
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Q4 2011 Production Figures for 10 Coal Companies
(ARLP, ACI, ANR, CLD, CNX, JRCC, PCX, BTU and WLT)
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| Region |
% Reported |
Q4 2011 Prod |
Seq Change |
Yoy Change |
2010 Total |
2011 Total |
| Capp |
99% |
33.55 |
-3.10% |
2.14% |
142.90 |
108.38 |
| CO/UT |
100% |
6.96 |
11.79% |
10.70% |
25.18 |
25.26 |
| Ill Basin |
100% |
16.23 |
-1.42% |
1.53% |
63.49 |
65.36 |
| Napp |
100% |
18.24 |
6.68% |
-4.13% |
72.63 |
72.85 |
| Other |
100% |
2.60 |
-10.09% |
-17.73% |
12.13 |
12.24 |
| PRB |
100% |
110.98 |
8.18% |
3.82% |
413.82 |
411.82 |
| West |
100% |
4.67 |
7.97% |
0.51% |
16.00 |
18.18 |
| Total |
100% |
193.23 |
4.89% |
2.32% |
746.16 |
714.10 |
Searching each mine for each company may sound tedious and time consuming, but it gives our clients a valuable ‘leg up’ heading into earnings season. If you are interested in learning more about DTC’s MSHA coverage or how it can help you be a more informed player in the coal space, please contact me: Sara Vorhees,
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.
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TUESDAY, January 17, 2012
The last one probably caught your attention, so let’s begin there. Congratulations go out to Dianna and her family, who are expecting their second child at the end of March. Sadly, Dianna will move her growing clan closer to extended family in New Mexico. As many of you know, Dianna was Steve’s first employee and has helped build the company that DTC is today. While she will no longer serve as head of the Grand Junction office, she will work remotely from New Mexico for DTC.
Please join us in welcoming Jim Dillon to DTC’s Grand Junction office. Jim will run the Grand Junction office and serve as Vice President - Research. Jim has been shadowing Dianna for the past seven weeks and will do so for another month, learning the ropes from ‘the master’. Jim is a great fit and possesses not only DTC’s strong work ethic, but is also a great match for DTC’s culture. Upon meeting Jim, we immediately knew he was ‘the guy’ for the job and we are lucky to add another high caliber employee to the team.
Last but not least, Sara Voorhees has been promoted to Associate Vice President - Research. Sara is beginning her fifth year with DTC and has become an integral part of daily operations and the research team. In addition to many skills, her mastery of the ins & outs of the MSHA database has turned that product into a useful and sometimes tradable catalyst. Her dedication, hard work and commitment to serving DTC’s clients should be bottled and sold on ebay for millions!
Congratulations to all and best wishes to Dianna as she prepares for her second child!
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WEDNESDAY, January 4, 2012
Everyone that cares about the coal and utility market is now aware that the Cross States Air Pollution Rule (CSAPR) was stayed at the 11th hour on Friday, December 30, 2011 by the U.S. Court of Appeals in DC. The court’s stay came as a surprise to us because this was this same court that had invalidated CAIR and subsequently stated that it would not tolerate a delay. It also surprised us simply due to the burdens that needed to be overcome by the plaintiffs that brought suit challenging the rule. Historically, stays of similar rulemakings were few and far between. However, it certainly speaks volumes as to the lack of quality of CSAPR, something that had become clear given the faulty analysis used by the EPA and all the subsequent revisions that followed.
So this is now the new reality, at least for the time being, that investors, coal corporates and utilities are living in. Here are some of our initial thoughts:
- Coal Demand to Increase in 2012: We see a direct positive impact on 2012 coal demand as a result of the CSAPR stay, something we had written about several times in the past when speculating the potential impact of a stay. Utilities have been more conservative in their 2012 coal purchases due to the generation limitations that CSAPR would have forced, so spot coal sales will likely increase. This will become more pronounced during the shoulder periods, at least until CSAPR is revised or replaced.
- CSAPR Credit Prices Collapsed: How can a market value a commodity when the rules of that market are unclear? CSAPR SO2 credits collapsed last Friday intraday (the day the stay was announced), from around $340 in the early afternoon to a bid/ask if $100/$150. There was some buying when trading resumed in the New Year, but we suspect that is simply short covering.
- CSAPR or CAIR Credits? Following the theme of the last bullet, the EPA has painted itself into a corner with respect to how it will handle the emissions trading aspect of CSAPR. Because CSAPR was stayed, not vacated, CSAPR credits technically still exist. However CAIR credits, which were removed by the EPA in October 2011, are back in play. CAIR credits will remain marked as “CAIR Termination” on the EPA website until the EPA reinstates those credits, which it said it would do the week of January 9th. So, depending on what happens after the court’s expected hearings in April 2012, either credit could conceivably be required for 2012 compliance. Note that the allowance submission date for 2012 occurs in March 2013.
- Command and Control Coming? How this ultimately shapes up is still uncertain, but the EPA is legally required to address interstate emissions transport. Could the court be leaning away from validating ANY emissions-trading program like CSAPR given the challenges of creating a system to effectively and legally handle interstate emissions transport? We can’t rule out the possibility that a command-and-control regime is a more likely replacement. Ominous!
- SIP versus FIP Would Cause a Major Delay: The timing of implementing a revised CSAPR (or a replacement to CSAPR), would be impacted if the reason for the court’s stay was based on the enactment of a federal implementation plan (FIP) versus the implementation of a state implementation plan (SIP). If federalism was indeed the reason for the stay, having the EPA approve all the SIPs, along with the required comment periods for each proposed SIP, would result in a very long process, possibly the 2-year delay some have opined.
So what’s the bottom line? This is clearly a positive for the coal markets in 2012, albeit a temporary positive. We believe 2012 coal burn should rise above expectations, particularly during the shoulder periods. This would remain the case until a revised CSAPR is implemented, or a replacement is enacted. However, the Mercury and Air Toxics Standard (MATS) is still coming as planned in 2015, at least at this point, and that is a plant-specific rule meaning that either a utility/power company remediates its plants to achieve MATS guidelines, or it shuts them. So, regardless of how CSAPR is revised, or when a replacement is enacted, the reprieve is real, but temporary.
So buckle your seat belts and (try to) enjoy the ride…
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WEDNESDAY, December 28, 2011
To The Editor,
Your chosen headline: 'The Coal Age is Nearer to its End' (12/23/2011) was a classic 'bait & switch'. The article was about 10 - 20% of the US coal-fired generation that is at risk of closing due to environmental regulations. It was not about the Coal Age nearing its end, nor is the Coal Age nearing its end. As your article rightly stated, coal-fired generation has lost ground to natgas-fired generation and inexpensive natgas prices are a factor. Hooray for natgas and hooray for free-market competition. Coal still has a 43% market share of the power mix and the next closest fuel, natgas, has a 25% share. Outside the US, coal's role is even more pronounced with coal generating more than 70% of electricity in growing markets like China and India. More than 40% of Indian electricity - mostly coal-derived, by the way - goes toward powering the well and irrigation pumps in the agricultural sector. Inexpensive coal-derived electricity is a major reason why India can self-sufficiently feed its population. Coal is pulling many other developing countries out of energy poverty as well. The Coal Age is thankfully not nearing its end and as a result hundreds of millions across the globe are no longer impoverished.
Respectfully submitted,
Stephen J. Doyle, Founder
Doyle Trading Consultants, LLC
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FRIDAY, December 23, 2011
The WSJ ran a few articles about the MATS rule and its impact on coal. It highlighted some of the costs of the EPA’s regulations on things like jobs and local tax revenues, some of the things the EPA likely missed in their press conferences.
How do I look at it? Different types of generation come in and out of favor all the time. Nuclear was hot, then it was not (this was when NextEra and Entergy bought a bunch of nuclear plants for a song and a dance), and then it was again. Combined cycle gas turbines (CCGT) were all the rage10-15 years ago, then gas spiked to $14/mmbtu and they weren’t, leading to bankruptcies and over-capacity. Now, they’re hot again. Coal was out of favor during the CCGT period, then became hot when gas spiked to $14, now with gas at $3.50 and the EPA continuing its frontal assault on coal, it's once again dead.
Call me crazy, but I’ve seen these cycles before. We’re already seeing increasing M&A activity for fully remediated coal plants by those with foresight and a knowledge of trends. Sorry, natural gas is not going to remain below $4.00 forever. Next year, maybe, given the overhang of storage, but not forever. Recall that the same predictions, that gas will remain below $3.50 through 2010, were being espoused in the late 90’s, which led to the CCGT build-out. That didn’t work out too well.
Unfortunately, the bad news for coal remains front-and-center and the EPA may not yet be done. There are still the coal combustion residuals (ash) rules and the cooling water intake structures rule, which are expected to be addressed by the EPA in 2012. While we are hearing these will be light-handed, there is no way to say for certain. If the EPA is satisfied with shutting about 20% of the coal plants currently operating, it may decide to back off. If not watch out.
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TUESDAY, December 20, 2011
With Henry Hub prices getting ready to breech the $3.00/mmbtu mark and sub-$3 prices already prevalent in some regions, I am frequently asked how the coal sector will fare. Is $3.00 natgas any worse than $3.75 natgas? The answer, of course, is yes. Quantifying the damage is beyond my ability. The most difficult questions are how low will natgas prices go and for how long? Some coal companies are more insulated than others due to contracts that were booked when prices were more attractive. Some coal companies are more insulated than others due to the contribution from coking coal. Some coal companies are blessed with low mining costs. However, to paraphrase Warren Buffet, “When the tide goes out, we will see who has something to hide.” High market prices can hide a variety of sins including high mining costs. The longer or the lower coal prices, the tougher it will be to delay the day of reckoning.
$3.00 natgas – only a few weeks after the beginning of the withdrawal season, no less – is an unwelcome event for coal producers. The biggest battleground (SERC) might be close to saturated as far as displacement is concerned, but natgas can displace coalgen in other NERC regions if the price is low enough. In many ways, the US coal market has dodged bullet after bullet in the past few years. The regulatory agencies have made sure that the market was not oversupplied. Weather has played a very bullish role (heat, cold, tornados and floods). China’s surprising demand in 2009 prevented a catastophe in the seaborne market. The ex-China seaborne market returned the favor in 2010 & 2011 with resounding demand (Japan’s quake/tsunami notwithstanding) and was supported by plentiful supply problems in every corner of the globe. Without this vital outlet for US coal, the US coal sector would be in a world of hurt.
It is looking increasingly probable that in spite of an economic recovery (however lame) and the positive impact from new coal-fired generation, domestic coal demand will be ‘hounded’ by low natgas prices and the current regulatory climate. Low natgas prices will enable steel mills to displace a few million tons of PCI coal. $3.00 gas will presumably displace several million tons of incremental coal burn in 2012 and will keep the electricity curves in the dumps. Low electricity prices will embolden utilities to maintain even leaner stockpiles and to shift even more coal buying into the prompt market. Until high cost coal production is shuttered, coal prices will suffer and will probably overshoot conventional wisdom as to how low they can go. As Ted pointed out, ACI reportedly furloughed 200 miners at its Dugout Canyon mine in Utah and at some of its steam coal mines in Eastern Kentucky. Considering the prevailing low coal prices and the weak utility demand, more closures will surely come from coal companies with high cost steam coal mines. Railroads and low cost producers will have to work double-time in order to defend coal’s market share, but until natgas prices rebound, they will surely have to engage in some ‘tactical retreats’.
To paraphrase Ebenezer Scrooge’s conversations with the Spirit of Christmas Future, “Are you showing me the shadows of things that have not happened, but will happen in the time before us? … But if the courses be departed from, the ends will change. Say it is thus with what you show me.” The seaborne market can be fickle, but if it continues to absorb almost 10 percent of US coal production, the coal sector might be able to ‘hang in there’ until natgas prices increase. While supply ‘events’ are unpredictable, they have been a regular occurrence and a continuation of such events (quakes, floods, heavy rains, heavy snows, terrorism, etc.) will also serve as ‘life lines’ to the US coal sector. And, of course, the coal sector’s perennial friend (weather) could support demand, but I fear we have already ‘worn out that welcome’. Needless to say, if there are no supply ‘events’ and/or if the seaborne thermal market takes a breather from US coal and/or if the seaborne coking coal market takes a pause and throws 10 – 15 million tons of ‘cross-over’ coal back into the domestic steam coal market, the market will not be a friendly one for low cost coal producers and will be a downright dangerous one for high costs producers.
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MONDAY, December 19, 2011
This morning, we reported that International Longwall News broke the story that Arch Coal (ACI) furloughed +200 miners at five steam coal operations in Kentucky and Utah. The company is scaling back production and personnel due to near-term weakness in the steam coal markets. The KY mines were formerly owned by International Coal Group (ICO), which ACI acquired in June.
Following the market collapse in 2008, producers throughout the U.S. slowly began announcing production cuts, and within 12 months, +85.0 mm tons of annual production had been shuttered. Output has not yet returned to pre-recession levels, but we imagine the low Capp forward curve coupled with high costs and continued weakness in natgas could take several million tons of coal out of the market. Stay tuned, as we will continue to track this catalyst closely (and we will have a summary report available for clients when production cut-backs merit one).
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WEDNESDAY, December 14, 2011
As many of you may know, I've spent almost 20 years writing sell-side utility, power and pipeline research. I've been through the natural gas bubble and the deregulation of the power markets in the 1990's, the collapse of Enron, the rise and fall of the Independent Power Producers, and the internet bubble (think EnronOnline and broadband “trading”). I’ve suffered through the recent commodity bubble along with many of you, unless you were on the right side of that trade, and watched my capital intensive, investment grade utilities get slammed by the liquidity crisis. Just when I thought I’d seen it all, now I'm knee-deep in EPA regulations and searching for the outcome. The more things change…
I also happened to spend a couple of years writing coal research, and for a humble utility analyst, that was an eye opener! It was during that time I became a client of DTC, and a friend of the firm. As a newbie in the space, I found the vast amounts of information provided by DTC an invaluable resource, as many of you likely do, but I simply took it for granted. Now, being on the inside and seeing what goes into the product has given me a new sense of respect for what DTC truly provides. The attention to detail and the commitment to the client, while a cliché of sorts, are front and center at DTC. And the best is yet to come.
Now I'm adding my utility expertise (think thermal coal demand), and my access to contacts in the sector, to the already packed DTC product offering. The initial reception has been great. I look forward to meeting all the loyal DTC clients, and implore you all to call me with any questions you may have as it relates to the coal demand side of the equation. I can be reached at
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, or 646-843-0598.
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