Stockpile Drawdown Signals Strong Coal Rebound

| About: Peabody Energy (BTU)
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The US coal sector plummeted on July 24 of 2012 as investors reacted to the release of the Q2 result of Peabody Energy (BTU).

Amid the bloodshed, few people noticed one important note during the conference call:

[Gregory H. Boyce]... With gas prices up more than 50% off recent lows, PRB coal generation is back in the money and coal plants are running strong. And the strong summer burn combined with improved supply demand fundamentals are starting to bring down stockpiles. June stockpile draws were nearly double the 10-year average. And second quarter cooling degree days ran 28% above the norm. We're also beginning to see customers reentering the market for 2013... (The highlight was mine)

I wonder if any one else caught the notion that the drawdown of the US coal stockpile in June doubled? This number is the single most important tracker of the US coal supply and demand, just like the EIA weekly NG storage number is for NG supply and demand.

I don't understand it! EIA releases the NG storage number on every Thursday. People watch it closely. If the injection was 2 or 3 BCFs above or below the market expectation, people freak out in knee-jerk reactions within minutes. But when Peabody said the US coal stockpile drawdown in June doubled, no one paid attention?!

Monthly US Power Sector Coal Stockpile in Thousand Tons
Month Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Year 2010 178,091 171,026 177,742 189,260 191,669 181,490 169,504 159,987 163,776 175,686 183,389 174,917
Year 2011 164,840 161,439 166,737 173,999 174,619 165,707 147,967 139,225 144,438 156,906 168,354 175,100
Year 2012 181,621 186,958 196,391 203,394 200,000E 178,000E

(The May and June 2012 numbers are my estimates)

I looked up the coal stockpile data in the EIA electric power monthly. See the table above. From May to June of 2010, the stockpile dropped from 191.669M tons to 181.490M tons for a reduction of 10.179M tons. From May to June of 2011, the drop was 8.912M tons, or from 174.619M tons to 165.707M tons. So the average US coal stockpile drawdown in June was nearly 10M tons. A June 2012 drawdown of double the amount, or 20M tons, has got to be very bullish for coal. But the coal sector sold off instead! Do you know that 10M tons of coal is equivalent to 145 BCF of NG?

The US coal stockpile in the power sector stood at 203M tons in April 2012. Based on my estimate, it should be down to about 178M tons at the end of June 2012. That was close to the 181.5M tons level at the end of June of 2010. See the EIA data.

A few weeks ago, I estimated the same US coal drawdown number. Based on the FERC estimate of electricity generation and natural gas consumption, I estimated that total US electricity generated in June was 375 TWH. The generation from natural gas was 106 TWH. The generation from renewable and other sources was 114 TWH. So the generation from coal was roughly 155 TWH. At 0.545M tons of coal per TWH, the consumption of coal was 84.5M tons.

Based on EIA weekly coal productions, I estimated that US production in June was 80.2M tons. With an estimated 13M tons of net exports and 5M tons consumed in other sectors, the supply to the power sector was 62.2M tons. So the coal deficit in June was 22.3M tons. That deficit must be drawn from the coal stockpile. My number is in good agreement with what Peabody just said in the conference call.

The official EIA number on US coal stockpile in June will not be released until the end of August. I believe that number will change people's sentiment in the US coal sector. I remember that the 2007-2008 coal rally started in August 16, 2007. Is the history repeating itself?

I am sticking to my long positions in James River Coal (JRCC), Arch Coal (ACI), Alpha Natural Resources (ANR) and Peabody Energy.

Disclosure: I am long JRCC, ACI, ANR, BTU.