A recent increase in US coal prices and a slight decline in natural gas are set to dent demand for coal as utilities use more gas to generate power, electricity traders said on Monday.
Prices of Central Appalachian coal have climbed to their highest levels since mid-December as prices and demand for coal remain strong in foreign markets and US miners look to export more of their product.
Meanwhile, natural gas prices have declined to their lowest levels since late January, due in part to continued high inventories from record shale production and still mild end-of-winter weather forecasts.
The relative price difference between NYMEX Central Appalachian coal and NYMEX Henry Hub gas has narrowed to less than $1 per million British thermal units (mmBtu) for the first time since early January, according to Reuters data.
Natural gas traded at $3.22/mmBtu Monday morning, while Eastern coal was selling for about $2.25/mmBtu.
Energy traders however noted it costs about $1/mmBtu to transport Eastern coal and an additional 50c to 75c per mmBtu to operate less efficient coal plants at current coal prices.
So when natural gas prices are less than $1.50 to $1.75 over coal, it's an easier decision for generators to burn gas rather than coal to produce power, according to traders.
In early 2012, a mild winter left a huge amount of gas in inventory, and record-high shale production pushed gas prices in April to ten-year lows, luring power companies away from coal in record numbers.
That is why US generators since 2009 have announced plans to shut more than 40 000 MW of coal-fired capacity over the next several years.
The weak gas prices have depressed power prices, making it uneconomic for generators to invest in emission control equipment needed to keep older coal plants compliant with stricter environmental rules.
Natural gas has been historically more expensive than coal, but in April 2012 gas traded at a ten-year low of $1.90/mmBtu due to oversupply while coal fetched about $2.12/mmBtu. That 22c gap had not been seen since at least 2001, according to Reuters data.
As gas prices rebounded, surpassing coal, the spread between gas and Eastern coal widened to more than $1, making gas less of a bargain. But now, the spread has fallen to less than $1.
The biggest US coal-fired power companies include units of American Electric Power, Duke Energy, Tennessee Valley Authority, Southern, Xcel Energy, NRG Energy and FirstEnergy.
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