U.K. Coal Inventories Fell in March to Almost Three-Year Low

U.K. coal inventories held by power companies fell in March to the lowest in almost three years after stocks were run down last year on weakening demand.

Inventories were 9.6 million metric tons, the lowest since April 2008, compared with 11 million tons in February, according to figures from the Department of Energy & Climate Change. They rose as high as 22.9 million tons in September 2009, the most for government data going back to 1995. Demand for coal weakened over the prior 12 months after Lehman Brothers Holdings Inc. collapsed, triggering recession in Europe, the U.S. and Japan and cutting demand for coal and power.

Prices also encouraged buying, with coal delivered to northwestern Europe averaging $70.39 a ton in 2009, according to IHS McCloskey, a researcher based in Petersfield, England. That compares with a $147.95 average in 2008 and $91.69 average last year, when global demand and prices were driven by China and India, the world’s most populous nations.

“Clearly in 2009 prices were very cheap and, with coal, a lot of these are contracts and you can’t necessarily renege on them,” so that swelled inventories, Amrita Sen, an analyst with Barclays Capital in London, said by phone today. Then “demand fell quickly and sharply and in 2010 they ran down inventories.”

Generators will have to re-stock in 2011, and the U.K. will import 18.5 million tons of coal for power this year compared with 17 million tons in 2010, Sen forecast.

Dark Spreads

Coal was burned to meet 28.5 percent of the U.K.’s electricity needs in 2010, compared with 47.5 percent from gas and 15.5 percent from nuclear generation, according to the government.

Dark spreads, a measure of profitability for burning coal in the U.K., have jumped 150 percent in the last year, according to Bloomberg calculations. Next-month dark spreads were at 7.42 pounds ($12.10) a megawatt-hour as of 11:40 a.m. in London. Higher profits at coal plants can encourage more coal burn. The dark spreads don’t include costs for emissions permits.

Coal generation became more favorable for electricity as natural gas prices rose following the conflict in Libya and Japan’s March 11 earthquake and tsunami and subsequent crisis at the Fukushima nuclear plant, while some utilites may be running down stockpiles to improve cash flows, according to Evolution Securities.

“Coal generators will be looking to maximise cashflow through better management of working capital,” Lakis Athanasiou, a London-based Evolution Securities analyst, said by e-mail. “Another element could be the switch from coal to gas as the price-setting fuel following Fukushima and Libya.”

To contact the reporters on this story: Alistair Holloway in London at aholloway1@bloomberg.net; Catherine Airlie in London at cairlie@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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