US Shale Gas Boom Depresses Coal Companies

The shale gas boom in the United States has been good news for companies involved in shale extraction and other including industrial companies and consumers who have benefited from lower prices for natural gas. But there is one industry in particular that has been impacted negatively in a big way by cheap and plentiful shale gas...the U.S. coal industry.

Both coal and natural gas are used to fire power plants across the country. And in fact, coal remains the largest source of electricity production in the United States. But the share of electricity in the U.S. generated by burning coal has been losing market share, as utilities switch to cheaper natural gas, falling to near a 35-year low.

In December, coal's share of the market fell below the 40% level for the first time since March 1978, according to the U.S. Department of Energy. Coal use for the generation of electricity peaked in 1985 at almost 60%. The drop below the 40% mark is a highly significant development since the United States is the world's largest electricity market.

Its significance has not gone unnoticed by the coal market. U.S. benchmark central Appalachian thermal coal prices recently dropped to $58 a ton, the lowest level in nearly two years. The price drop did not escape the notice of the stock market either. The stocks of leading U.S. thermal coal miners including Consol Energy (NYSE: CNX), Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR) have dropped sharply and are near 52-week lows.

The drop in coal prices is forcing many domestic coal miners to cut back production and also attempt to export their excess supplies overseas into the $100 billion thermal coal seaborne coal market. This, however, is having a knock-on effect in that market. U.S. exports are creating a glut in that market too, sending global thermal coal prices to a 15-month low and hurting the leaders in that sector like Rio Tinto ADR (NYSE: RIO). Other large global producers of thermal coal include Anglo American and Xstrata.

Annual contracts last year for thermal coal with large Asian consumers like Japanese utilities were settled at $130 a ton, a rise of 32.6% from the $98 a ton the previous year. It is expected that this year's contracts will be settled roughly 10%-11% lower at between $115 and $120 a ton. This is not a disaster yet for the likes of Xstrata and Rio Tinto with demand still rather robust in the Asia-Pacific region. After all, last year's price was an all-time record high and $115 a ton would be the third highest price ever for an annual contract.

The $115 a ton price probably looks tremendous to U.S. producers of thermal coal who are only receiving $58 a ton domestically. Expect more and more U.S. thermal coal to enter to the global seaborne market, thanks to cheap freight costs and the higher thermal coal prices overseas. As this occurs, the share prices of coal companies like Arch, Alpha Natural and Consol should stabilize and retrace some of their recent losses.

This article was originally written for the Motley Fool Blog Network. Please check out all my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/ or subscribe to them there.