Reading through the 3Q15 reports from US coal companies, one refrain appeared regularly: US thermal coal demand continues to be hit by competition from low-priced natural gas. And this thought was quickly followed by another: that natural gas prices would start to rise as the US begins to export its gas as LNG, boosting demand for coal. As theories go, it has certain attractions – the main one for US coal companies being an end to the US natural gas glut that has so harmed US coal demand. It may also be wishful thinking.
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Wood Mackenzie recently released a report looking at the global LNG market – a market that it reckons will be awash with 130 million tpa of new supply by 2020, primarily from Australia and the US. In a story that will feel all too familiar to the coal industry, this new supply will come online at a time of faltering Chinese demand.
So where will the new supply go? According to Wood Mackenzie, “new demand for gas and LNG could be created through the displacement of coal in power generation” – primarily in Asia and Europe. This would mean that the price at which gas displaces coal would become a floor for LNG prices. That displacement price will in turn be determined by the price of coal.
Simply put: the higher the price of coal, the higher the gas price can be in order to displace said coal. US LNG exporters need a price of around US$5/million Btu to cover costs – a price likely to be achieved with ARA coal prices of US$70/t and Japanese coal prices of US$80/t, according to Wood Mackenzie.
But with all this new LNG floating around displacing coal, prices for the black rock seem likely to fall: that’s simple supply and demand. And here is where it gets interesting for US coal companies. “At prevailing ARA coal prices of US$50/t and Japanese coal prices of US$60/t CFR, a floor price for gas in Europe and Asia could go down to prices at which many US LNG exports fail to cover cash costs,” says Noel Tomnay, Head of Global Gas and LNG Research at Wood Mackenzie. “This would force US LNG exporters to consider shutting-in for periods, a move which would depress US gas prices.”
Under that scenario, there would be no relief for US companies: no great switch back to coal. That is the nightmare. A better scenario for US coal sees US LNG exporters opting to continue to operate their plants – even as a loss – given the huge, debt-fuelled capital investment sunk into their new LNG export facilities.
But this simply relocates the problem of low-cost gas from the US to the rest of the world. Whatever scenario comes to pass, competition for share of the global energy mix is likely to become tougher over the next five years.