The demand for natural gas has been increasing in the U.S. and is expected to increase in the near-future as well. On the other hand, demand for coal is increasing in Europe. In the current year, U.S. coal exports to Europe are expected to reach a record high. However, the trend of rising coal demand in Europe is not expected to last for long.
The recent shale gas boom has brought significant changes in fuel usage around the world. In the U.S., as prices of natural gas have decreased in recent times, its usage for power generation has increased. Natural gas is one of the cheapest sources of power generation in the U.S.; almost half the price of coal. The usage of coal in the U.S. for power generation is on a decline, as it is comparatively expensive. Electricity generated by coal is at its lowest level in the last four decades. The decline in prices of natural gas is due to hydraulic fracturing, which now produces one-third of natural gas in the U.S. Natural gas prices in the U.S. are near a 10-year low.
Furthermore, stricter regulations in the U.S. have reduced coal demand domestically. This has created an interesting situation with coal producers finding overseas markets more attractive, as the economies are growing and concerns regarding nuclear energy are on the rise. Coal demand around the world has been strong and growing, particularly in Europe and China.
Coal prices have plunged from $161 a ton in 2008 to $63 a ton in September 2012. Warmer-than-normal winters last year resulted in coal stocks being piled up, which have put a downward pressure on coal prices in the U.S.
Going forward, prices are expected to remain at low levels because of lesser usage of coal in electricity generation. The U.S. has the world's largest coal reserves. Total coal consumption in the U.S. has been decreasing in recent years. In the first quarter of 2012, total domestic consumption stood at 206.9MMST, the lowest since the second quarter of 1988. The chart below shows the slowing trend in U.S. coal consumption over the recent quarters.
Domestic consumption slowing down has led U.S. coal stock levels to soar. Total U.S. coal stocks increased to 244MMST in the first quarter of 2012, as compared to 225MMST in the last quarter of 2011. The chart below shows the rising U.S. coal stocks over the years.
U.S. coal exports to Europe increased by 29% YoY in the first quarter of 2012, as power companies in the continent switch from natural gas to coal for power generation. Power generating companies in Europe are taking advantage of the lower prices of coal and the fall in carbon emission fees. Natural gas prices are currently at high levels in Europe because they are associated with oil prices. U.S. coal exports have been increasing. Total U.S. exports stood at 28.6MMST in the first quarter of 2012. Almost half of U.S. coal exports are to Europe.
Increasing usage of coal in electricity generation in Europe is not consistent with the continent's long-term plan of cutting emissions by 20% by 2020. Coal usage in Europe is expected to increase carbon emissions by 2.2% in 2012. On the other hand, carbon emissions in the U.S. are expected to fall by 2.4% this year.
In France, nuclear power plants are the main source of electricity generation, however, the contribution of coal in total electricity generation this year so far increased by almost 45% compared to 2011. Similarly, the usage of coal in the U.K. increased by 43% in the first half of 2012.
However, the trend of higher coal usage in Europe is not expected to last for long. Authorities in the EU are expected to push for reduced coal usage, in accordance with their long-term emission control plan. Emissions fee is 7 euros per ton, which is considered to be insignificant for reducing emissions, and is expected to increase in the coming years. Furthermore, emissions permits are expected to be auctioned in the coming years which will attach extra cost to coal usage. There is also a proposal being considered by the European Commission to discontinue few surplus allowances. U.S. coal exports to Europe in the coming years might experience a slowdown due to an expected increase in domestic U.S. demand for coal, if shale gas prices rise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Energy Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.