Mirroring oil, this fossil fuel is plunging, too

Luke Sharrett | Bloomberg | Getty Images

A bulldozer moves coal that will be burned to generate electricity at the American Electric Power coal-fired power plant in Winfield, West Virginia.

Oil isn't the only fossil fuel that's getting cheaper.

The plunge in oil prices is mirrored by the cost of coal, which has been cut in half since 2011 and is expected to keep falling. What's more, the drop in prices is adding pressure to U.S. coal producers.

Coal prices are falling for the same reasons crude is selling for half what it did last summer: There's too much supply at a time when global demand for coal is cooling.

The latest evidence came last week, when China reported an unexpected 20 percent drop in imports, largely from lower volumes of coal oil and other commodities. After a streak of red-hot growth, China's economy is downshifting as Beijing tries to reign in an overheated housing market and a lending boom that's left behind a pile of bad debts.

The world's largest consumer and importer of coal is also restricting imports of coal with high ash and sulfur content as it tackles a serious air pollution problem.

The cooling of China's building boom will also depress demand for coal used to make steel. China produced a record 822 million tons of steel last year—roughly half of global output, according the National Bureau of Statistics. But production was up just one percent, the slowest annual growth rate in 33 years. Analysts say demand is unlikely to rebound this year.

For coal producers who rely on Chinese imports, the downturn in demand and the drop in prices is costly. South Africa's mines minister recently estimated the drop cost the country $2 billion in export revenues.

"(China) will be a major cause of depressed global import demand this year," said Wood MacKenzie analysts in a recent report on coal prices.

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Demand is also falling in the U.S. as power companies continue to switch from coal to cleaner-burning natural gas. Thanks to the ongoing boom in natural gas production in the U.S., power companies in the lower 48 states consumed record amounts of natural gas to generate power last month as low prices made it cheaper to burn than coal, according to data from Thomson Reuters Analytics.

"Low prices, particularly in the U.S. Northeast, have provided gas-fired plants with a significant advantage over coal despite warmer temperatures and lower demand for heating this winter," Kyle Cooper, an analyst at IAF Advisors, told Reuters.

Meanwhile, power companies last year shut down about 4,300 megawatts of coal-fired generation in favor of cheaper gas-fired plants. Power companies running older coal plants also face the higher cost of upgrading them to meet stricter federal environmental regulations.

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This year, another 22,000 megawatts of coal-burning capacity is expected to be shut down, according to Reuters, forcing generators to burn even more gas to make up for lost generation.

But as demand has fallen, coal producers around the world show no signs of easing up on output. Lower oil prices have helped cut production costs. And major producers in Australia, Indonesia and Russia are getting a boost from the devaluation of their currencies. That makes their coal cheaper, in dollar terms, on the global export market.

"Australian mines are in a relatively strong position compared with higher cost suppliers—particularly those in the U.S.—which are at much greater risk of closures this year," according to Wood MacKenzie.

Declining production has brought consolidation among U.S. coal producers, leaving four companies—Peabody Energy, Arch Coal, Alpha Natural Resources and Cloud Peak Energy—controlling more than half of U.S. output. Last month, Peabody slashed its quarterly dividend by 97 percent—to 0.25 cents per share—to save cash. Other coal producers have been slashing costs to try to ride out the drop in prices.

Last week Arch Coal suspended its dividend and reported a smaller-than-expected quarterly loss, thanks to a 29 percent drop in operating costs.