Wall Street Journal
Coal Gets Burned By Low Gas Price

Thursday, August 26, 2010

Fall in the Cost of One Resource Used to Fuel Power Plants Is a Drag on the Other

A slump in prices of natural-gas futures is having a knock-on effect in the U.S. coal market.
Gas prices have fallen so far, trading Wednesday at a five-month low of less than $4 a million British thermal units, that gas-powered plants are able to capture a bigger share of the market.

That is sapping demand for coal and driving down prices of Central Appalachian coal futures. The front-month contract settled at $60.05 a ton Wednesday on the New York Mercantile Exchange, down 15% since reaching a 20-month high of $70.87 a ton Aug. 5.

Once natural-gas prices reach $4, "you see significant shifting pressure," said Rusty Braziel, managing director at Bentek Energy, which tracks energy-market data. September gas ended Wednesday down 4.2% at $3.871 a million BTUs.

Eastern coal prices had climbed steadily since February before the recent pullback but remained well below record levels above $140 a ton reached in mid-2008. Plants that run on coal from the largest U.S. coal basin in Wyoming tend not be affected by natural-gas prices because of the low cost of Western coal.

Competition between coal and natural gas—known in the industry as fuel switching—was rare before last year and happens today mostly in the eastern U.S. Natural-gas production has boomed with the development of shale-rock formations across the U.S., and producers haven't shown signs of pulling back even as prices have declined. At the same time, supplies of eastern coal have tightened because of tougher environmental regulations, higher production costs and dwindling reserves.

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