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US utilities burning gas to preserve coal supplies

Companies are burning natural gas in order to preserve coal stockpiles before demand increases during the winter heating season because of inconsistent rail deliveries, according to Morgan Stanley. (MS)

Coal stocks at utilities in July, the most recent month for which data is available, were at 125.4 million tons, the lowest for that month since 2004, as railroads struggled to replenish power producers’ coffers after a frigid winter forced them to eat through supply, government data show.

As the next winter approaches, some utilities wary of having enough coal to meet demand are choosing to use natural gas generators. Coal from Wyoming’s Powder River Basin is competing with space on Western rails with a record grain crop and booming oil production from the Bakken shale formation in North Dakota.

“The Polar Vortex really cleaned out inventories,” Evan Kurtz, vice president of metals and mining at Morgan Stanley in New York, said on a conference call today with investors.

Kurtz said some utilities are burning gas over coal even if it’s not economical to do so because of supply concerns.

Powder River Basin coal has dropped 8.1 percent this year to $10.80 a ton, data compiled by Bloomberg show.

Even though stockpiles are low, concern about the ability to receive shipments has kept prices from increasing, Kurtz said.

The average train speed this year is at the lowest level since 2009 and dwell time, a measure of how long loaded railroad cars sit in a rail yard, is the highest in records going back to 2008, data compiled by Bloomberg show.
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Laws in the Powder River Basin limit how much coal a mine can store on site, so they’ve been forced to reduce production, according to Kurtz.

Warren Buffett’s BNSF Railway Co. has said that it plans to spend $5 billion this year to improve service.

Once the rail problems are alleviated, utilities that were concerned that they didn’t have enough coal on hand may boost consumption and increase the amount of the fuel that they have stockpiled, Kurtz and Stephen Byrd, also a Morgan Stanley analyst, said today.

“They will actively seek to get inventories up,” Byrd said on the call. “We’re going to see a long-term restocking by these companies.”

Sunflower Electric Power Corp., based in Hays, Kansas, said last month that it tempered the amount of the fuel it feeds to its Holdcomb Station plant.

Allette Inc.’s Minnesota Power Co. said Sept. 12 that it idled an operation to help preserve low stockpiles due to the spotty rail service.

Source: Bloomberg