US coal consumption down 14% from peak

12 Jun 2012 by Jim Fickett.

There is a great deal of pessimism about US coal companies these days, with the price of Peabody Energy, for example, barely above its 2008 low (Time to take a close look at coal), and Arch Coal down from a peak of about $73 to a current value of about $6. Most importantly, this is because US electric utilities are switching many plants from coal to gas. Secondarily, exports have also been hit, as China decelerates.

Most of the news is anecdotal, perhaps because it is major undertaking to dig up time-series coal data on the Energy Information Administration website. When one does look at the data, it turns out that the recent decrease in US consumption really is quite unnerving. Note in the graph below (data through February) that the gap between domestic production and consumption is about as wide as is has been in the last three decades, and apparently still getting worse.

So things are indeed bad for coal. But one must keep in mind that while the market often prices assets on the basis of this week's news, the true value of a company is determined by all future earnings. Despite difficult new regulations from the EPA, and competition from currently cheap natural gas, the US will continue to use and export coal far into the future. The challenge will be to quantify the present value of that future usage.