Slumping coal demand is very apparent and a lack of export facilities in the U.S. is aggravating the situation further for miners. Recently Alpha Natural Resources (NYSE:ANR) had to shut down two coal mines – the Bee Tree Mine in Raleigh County and the Twilight Mine in Boone County.  This caused a total of 130 lay-offs.
The subdued demand environment for coal can be attributed to primarily two factors – weakness in the economy and extremely low natural gas prices. Moreover, the situation was exacerbated by an unfavorable climate in winter which saw demand for coal in power generation plummet. Most of the coal miners such as Arch Coal (NYSE:ACI), Peabody Energy (NYSE:BTU) and CONSOL Energy (NYSE:CNX) are under pressure. ANR may look for alternative operations to diversify its business.
Our $20 price estimate for ANR is 65% above its current market price reflecting its long term prospects where coal demand will revive as it reaches a balance with the natural gas and it increases its export capabilities.
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Utility & Industrial Coal demand growth slowing down
The rock bottom natural gas prices are good incentives for power generation companies to switch to gas fired plants from coal fired plants. Utility coal produced by some of the mines as a result is getting challenged to find takers. The Twilight mine is a thermal coal mine and had to shut down. This is an indication towards America’s increased dependence on natural gas.
The industrial demand for coal is largely related to how the economy performs. The U.S. economy is still recovering and industrial demand for coal has been moderate lately. We believe, as the economy recuperates, the demand environment will improve. We expect coal demand in utility and industrial segment to dip in 2012 and have a moderate growth hence forth.
Metallurgical coal demand also slumping
It’s not only the thermal coal which is affected. Even demand for met coal is struggling. Met coal which is consumed in the steel industry, in particular has seen demand to dry up recently. Steel, which is used in infrastructure projects has seen falling demand as the economy stagnated. The Bee Tree mine was producing met coal which was closed on May 11. According to our estimates, met coal shipments will face moderate growth in 2012 before catching up later in 2013 and afterwards.Notes:
- Alpha Natural Resources to Idle Two Surface Mines in West Virginia, wvnstv.com, May 12, 2012 [↩]