Coal miners are Wall Street pariahs right now, but that could change quickly once coal supply and demand start to stabilize. Utilities, mining equipment makers, and railroads are all starting to talk about the first signs of progress for the beleaguered miners.
Utilities are using more coal
When it comes to generating electricity, fuel cost has a huge impact on what gets burned. In the first half of the year, for example, Duke Energy Corp (NYSE:DUK) increased the amount of power it generated from coal in its Commercial Power unit by 18% and decreased natural gas-fired power by about 20%. The reason behind the switch was an increase in the price of natural gas.
Although revenues at the Commercial Power unit are about a tenth the size of those generated from the company’s regulated arm, Commercial Power operates in a highly competitive market. Because of this, keeping costs low is paramount. That natural gas is losing out to coal right now is a notable shift.
American Electric Power Company, Inc. (NYSE:AEP), another utility giant, is also making the coal switch. It used 37% less natural gas in the first half and increased its use of coal by around 4%. That said, the long-term trend is still toward increased natural gas generation. This accounts for around 17% of the company capacity, more than double what it was two years ago. Coal, however, still represents about 70% of the total.
For American Electric Power Company, Inc. (NYSE:AEP) and Duke Energy Corp (NYSE:DUK), the flexibility to switch to the lowest cost fuel mix is important to profitability. With natural gas prices higher year-over-year, the companies are already making the switch. While this may not boost coal demand much through the end of this year, it suggests that 2014 will be a better one for the miners.
The mining equipment view
That sentiment is echoed by Caterpillar Inc. (NYSE:CAT) and Joy Global Inc. (NYSE:JOY), two of the largest sellers of mining equipment. Caterpillar noted in its second quarter earnings release that higher natural gas prices “made coal more competitive for electricity production.” It went on to say that it expected a 1% increase in coal production in the second half of the year. That may not sound like much, but it is potentially the start of a trend.
Joy Global Inc. (NYSE:JOY), meanwhile, believes that the U.S. thermal coal market will be among the first of its natural resource end markets to recover. In fact, it believes that utilities will continue to burn down their coal stockpiles this year, setting “the stage for coal delivery increases” next year.
A sliver of an increase in the second half of the year with a demand uptick more than three months away is actually great news for the coal industry. That said, if U.S. coal is the first end market to recover then Caterpillar Inc. (NYSE:CAT) and Joy Global Inc. (NYSE:JOY) have a lot longer to wait before their own businesses start to turn higher. Sales at Caterpillar Inc. (NYSE:CAT)’s Resource Industries segment (which produces mining equipment) saw a second quarter drop of 34% while Joy’s equipment sales fell nearly 5%.
Joy Global Inc. (NYSE:JOY) believes that sales will remain weak through 2014 as well, so you should probably avoid this pair until there’s an uptick in orders. Their positive “outsider” view of the coal industry provides additional evidence of the U.S. thermal market’s nascent turn, however.
More hauling going on
Norfolk Southern Corp. (NYSE:NSC) saw notable year-over-year volume declines in metallurgical coal, export coal, and industrial coal in the second quarter. Utility coal volume was up 3% in the quarter, however. That trend was consistent with Union Pacific Corporation (NYSE:UNP), which saw a 1% uptick in the tons it hauled out of the Powder River Basin, the cheapest coal region in the United States.
