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Coal consumption in the U.S. has been increasing for the last few months and this trend is expected to benefit the U.S. coal companies. Total coal consumption in first-quarter 2013 was up by 11%, as compared to 1Q'12. The surge in coal consumption is mainly due to higher coal usage by electricity generators. According to the Energy Information Administration's [EIA] report published last week, the recent increase in U.S. coal consumption is being met by burning through stockpiles at electricity power plants, rather than buying new supplies. Despite the surge in coal consumption in recent months, purchases of coal by electricity generators actually decreased by 5% in 1Q'13 as compared to 1Q'12. The demand for coal, however, is likely to recover as stockpiles continue to decrease.

In April, coal stockpiles at electricity power plants fell below the 5 year monthly average; this is the first drop in the average since December 2011. Lately, the recovery in the coal consumption is primarily driven by the rise in natural gas prices that resulted in 'reverse coal to gas switch.' In the last five months, coal fired electricity generation in the U.S. has increased to 40%, as compared to 37.4% in 2012.

In April 2012, natural gas prices dropped to historic low levels, which prompted electricity generators to burn cheaper gas, leading to a rise in coal stockpile levels. As the coal stockpile levels will decrease over time at electric power plants to meet consumption, demand for coal will recover and benefit the U.S. coal companies. The U.S. coal production is expected to rise by 3% in 2014, as compared to 2013. The following graph shows the decreasing coal stockpile levels at electricity power plants.

Source: eia.gov

The U.S. coal companies that are expected to benefit from higher coal consumption by power generators are Peabody Energy (BTU), Cloud Peak Energy (CLD) and CONSOL Energy (CNX), as all of these three companies are highly leveraged to thermal coal. Coal companies have lost a significant proportion of their market value since February 2011. The following table shows the price performance of the U.S. coal companies and coal ETF (KOL).

KOL

BTU

CNX

CLD

Price Performance since Feb. 2011

-60%

-72%

-39%

-25%

Source: Google finance

On the other side, metallurgical coal producers are most likely to experience tough market conditions in the short term due to a drop in the benchmark price of coking coal for 3Q'13. The drop in the benchmark price for coking coal has made metallurgical coal production cuts unavoidable. In the short term, a metallurgical coal production cut is the most important factor that can bring about a price recovery. Walter Energy (WLT), Arch Coal (ACI) and Alpha Natural Resources (ANR) are the U.S. coal companies that are highly leveraged to metallurgical coal operations. Readers can view my recent article 'Struggling U.S. Coal Companies Face Another Headwind' for more information on the drop in the coking coal benchmark price.

The following table shows the price performance of WLT, ACI and ANR since February 2011:

WLT

ACI

ANR

Stock Price Performance since Feb. 2011

-90%

-88%

-90%

Source: google finance

Conclusion
Rising U.S. coal consumption and the drop in the stockpiles of the power generators are positive signs for the thermal coal producers. The drop in monthly five-year average in stockpiles can also be viewed as a sign of recovery for the thermal coal markets.

Source: Rising U.S. Coal Consumption To Benefit The Industry