Regardless of your stance on “clean and green” energy sources, the reality is that the United States depends on coal-fired power plants for about 45 percent of its electricity generation. You can see the contributions from the various other fuels in the EIA graph below.
Coal-fired power plants are easy to spot. They have a mountain of coal sitting next to them. Utilities typically have about 60 “days of burn” on hand. A day of burn is enough coal to run the plant continuously for 24 hours.
Utilities generally try to maintain roughly 60 days of burn in the event of supply disruptions, primarily due to weather (flooding, snowstorms, hurricanes, etc.).
Due to floods along the Ohio and Mississippi Rivers in late April and the early part of May, coal barge traffic was disrupted for nearly a month. This delayed coal delivery to a number of coal-fired generating stations, most of which are located in the Southeast.
As you can see from the graph below, this has resulted in monthly coal stockpiles that are at five-year lows. U.S. utilities, which burn about one billion tons of coal per year, collectively had about 139 million tons on hand at the end of August 2011. That’s the lowest August level since 2006.
Coal stockpiles typically decline during the summer months. That’s when utilities have most of their plants running flat out due to increased air conditioning loads on the grid.
Utilities have let their stockpiles dwindle due to the increased spot price for coal. Central Appalachian coal, the standard benchmark for Eastern bituminous coal, increased 18 percent from August 2010.
The utilities’ dwindling inventory of coal is great news for coal producers. Coal exports continue to remain strong. Last year, China’s thermal coal imports increased nearly 50 percent from the year before. As utilities here bring coal inventories back up to pre-flood levels, thermal coal producers can ship all they can mine.
Big thermal coal producers
That’s been a boon to U.S. thermal coal producer Arch Coal Inc. (NYSE: ACI, Stock Forum).
Here’s why I like Arch: The location of its mines and its easy access to port loading facilities give it a big advantage over some of its domestic competitors. It ships coal domestically and to customers on four continents globally.
Alpha Natural Resources, Inc. (NYSE: ANR, Stock Forum) is another big U.S. coal producer that’s substantially ramped up its production and exports in response to Australia’s woes. Why do I like it? Simple: It has more export terminal capacity than any other U.S. producer.
Internationally, BHP Billiton Limited (NYSE: BHP, Stock Forum) and Rio Tinto plc (NYSE: RIO, Stock Forum) should both benefit for the foreseeable future trying to satisfy China and India’s increasing demand for coal.
All of the above companies are good long-term bets on thermal coal. Use big market pullbacks to establish or add to your position. The demand for thermal coal for power generation is stronger than ever. That will ultimately show up in one place: the bottom line earnings of the producers mentioned above.