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Are You Prepared for an Abrupt Shift in the Coal Sector?

Are You Prepared for an Abrupt Shift in the Coal Sector? By Steve Doyle/BtuBaron LLC (June 8th, 2016) Dedicated to Ben Hatfield (1956-2016) - a great man and my personal hero. Rest in Peace, my friend. Successful traders understand the most important characteristic about supply & demand in the coal sector is neither the price trends nor the measured surpluses & deficits; it is the disconnect in the time it takes for supply to adjust to changes in demand. Barring exogenous events, coal supply changes at a much slower pace than demand which can change in a heartbeat, catapulting prices higher when the market is undersupplied and pulling prices lower when it is oversupplied. We are currently exiting an unprecedented period during which demand for thermal and coking coal initially soared coaxing supply to respond in full glory and then demand abruptly reversed course wreaking havoc in its path. In the seaborne market, China was the primary engine behind the soaring demand and, ironically, was one of the primary engines behind the soaring supply and the declining demand. Meanwhile in the US - the world’s second largest coal market - the natgas sector along with openly anti-coal regulatory policies decimated domestic coal demand. Too many US coal producers went ‘all-in’ to bring on low-cost production that they hoped would improve their chances of surviving the impending massacre. (For most of them, this strategy was unsuccessful.) I cannot think of an appropriate metaphor that could justly convey the complex nature of the global coal beast other than it is just that, a beast. This beast cannot be slain, tamed, contained or even fully understood. It can only be respected; feared by end-users and producers alike when it can do harm and appreciated when it can do good. It feasts on natural fluctuations generated by uneven economic growth, unpredictable weather patterns, new technology, acts of god, political intervention and dumb money. It is indifferent as to whether its victims are coal users, who are forced to pay a hefty premium, or coal miners whose operating & capital costs are much higher than the sales price. Aside from the preponderance of dumb money, the actions and interactions of these other variables are beyond this analyst’s ability to forecast. (To read the full report, please click on the tab)