Gas futures provide hope for coal demand bump

Gas futures provide hope for coal demand bump

For US coal producers, three is the magic number.

A natural gas price above $3/mmBtu would make burning coal the more profitable choice at some power plants, increasing demand for coal, US producers said. And while near-term gas prices remain too low to motivate many generators to shift to coal-fired power, prices further out on the curve are showing signs of hope for coal producers.

The 12-month strip for Nymex gas delivery at the Henry Hub settled yesterday at $2.911/mmBtu, nearly 80¢ above the October contract. And the 2021 calendar year price settled at $2.971/mmBtu, just a few cents below the $3/mmBtu target for some coal-fired generators.

Higher gas prices could help pause the industry challenges that have slashed coal consumption and production to multi-decade lows. US coal companies produced an estimated 383.7mn short tons (348.1mn metric tonnes) of coal this year through 19 September, down by 26.2pc compared with the same period last year, US Energy Information Administration data show.

"We could use a gas [price] with a $3 on it," one producer said. "That would solve a lot of these problems."

An Argus analysis of historical natural gas prices and spark spreads in the PJM Interconnection, the nation's largest power grid, found a significant shift in coal profitability once the gas price eclipsed $3/mmBtu.

Since 2008, day-ahead spark spreads for 10,000 Btu/kWh coal units at the PJM West hub were at a premium to 8,000 Btu/kWh natural gas units just 4pc of the time when the Henry Hub day-ahead natural gas price was below $3/mmBtu. When the price was between $3-$3.499/mmBtu, coal units were more profitable 27pc of the time.

Coal competitiveness continued to advance as gas prices rose. Once the day-ahead Henry Hub price was $3.50-$3.999/mmBtu, coal spark spreads were higher than natural-gas margins 60pc of the time.

Coal in the Midcontinent Independent System Operator (MISO) has been less influenced by the $3/mmBtu threshold.

Since 2012, when Argus started assessing power prices at the Indiana hub in MISO, coal margins at the hub have been at a premium to natural gas 15pc of the time when natural gas prices were below $3/mmBtu. Coal sparks were higher than natural gas 19pc of the time when gas prices were between $3-$3.499/mmBtu. But prices between $3.50-$3.999/mmBtu resulted in coal margins beating natural gas just 20pc of the time.

For coal margins to maintain a premium over natural gas a majority of the time in MISO, gas prices would likely have to climb above $4/mmBtu. When the Henry Hub day-ahead price was between $4-$4.999/mmBtu, coal margins in MISO where higher than natural gas 67pc of the time.

Any coal demand recovery because of higher natural gas prices also is likely to be seasonal. Nymex natural gas futures prices yesterday showed just two periods of $3/mmBtu or higher during the next seven years: December 2020-March 2021 and December 2021-February 2022.

"Coal needs support from natural gas prices, support from exports, or both," another coal producer said. "We have not had either for a while. We are getting there with gas prices."

There already are signs that the higher gas futures for this winter have increased coal demand.

East Kentucky Power Cooperative is seeking up to 1.1mn st of spot coal with deliveries starting in October and lasting up to six months. It needs up to 125,000 st/month for its Spurlock units 1 and 2, and up to 60,000st/month for units 3 and 4.

By Jim Foster

Fuel margins relative to gas price at PJM West