By Molly Christian and Hira Fawad, SNL Energy
Production in the largest U.S. coal supply region, the Powder River Basin (PRB), fell 9.4% in the second quarter from the same time in 2014 as competitive natural gas prices, unit retirements and weather-related delays offset the benefits of the basin’s cost advantage to other U.S. coals.
PRB output fell to 90.3 million tons in the second quarter, down from 99.6 million tons in the prior-year period. The decline occurred even as U.S. rail performance has improved from 2014’s battered levels, with heavy rains in the 2015 quarter flooding mines and disrupting deliveries.
“Our PRB operations received more than [their] average annual rainfall in less than two months late in the quarter,” Peabody Energy Corp.’s Chief Financial Officer Amy Schwetz said during a July 28 earnings call. “While wet weather continued during the first several weeks of July, shipments are ramping back up.”
Lower utility demand also depressed production. A resurgence in coal-to-gas switching and the retirement of several generating units in response to the U.S. Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standards have forced producers to ratchet back output. Cloud Peak Energy expects PRB coal burn to fall by 30 million to 40 million tons in 2015 on the regulatory and market headwinds, including increased dispatch of renewable generation.
“The reduction in the PRB we’re seeing there is…real,” said Colin Marshall, president and CEO, Cloud Peak Energy, during a July 29 earnings call. “Quite frankly, for some of that coal, there isn’t a market to…go to in the future.” The biggest production percentage decline of the PRB’s 16 mines occurred at Cloud Peak’s Cordero operation. Cloud Peak had been planning to reduce output at Cordero by about 10 million tons per year (tpy) starting in 2015 in light of higher costs and waning demand and prices for the PRB’s lower-heat 8,400 Btu/lb coals. The rainy weather and lower-than-expected demand may have forced Cloud Peak to make deeper cuts, with Cordero’s output falling to 4.5 million tons in the second quarter from 8.6 million tons a year prior, representing an annual decline rate of about 12 million tons.
The next-biggest percentage drop was at Peabody’s North Antelope Rochelle mine, the largest in the country by volume. North Antelope Rochelle’s production slumped to 23.8 million tons in the second quarter, down 16% from a year ago and matching the overall drop in Peabody’s total coal sales. In its earnings report, Peabody said most of the 5.5 million-ton reduction in its second-quarter PRB shipments was from North Antelope Rochelle as a result of adverse weather.
Output from Arch Coal’s Black Thunder mine, the second-biggest in the PRB, sank 5.7% to 23.5 million tons, while production from Cloud Peak Energy’s third-place Antelope mine dropped 5.6% to 7.6 million tons. During a July 30 earnings call, Arch said it missed about 3 million tons of PRB shipments mainly on rail issues resulting from the heavy rain.
Some mines managed to raise shipments despite the dismal market and operating conditions. Alpha Natural Resources Inc. increased output at its Eagle Butte mine by 2.9% year-over-year to 4.9 million tons while production from its Belle Ayr mine surged 15% to 3.7 million tons. More details on the gains could come August 5, when Alpha is scheduled to release second-quarter results.
Other mines farther up in the PRB also lifted production, potentially reflecting better weather than in the southern part of the basin where the biggest declines occurred. Peabody’s Caballo mine produced 68% more coal in the quarter at 2.8 million tons. Volumes also rose from Black Hills’ Wyodak operation and Western Fuels Association’s Dry Fork mine, which both serve adjacent plants and were likely spared the worst rain-related impacts.
PRODUCERS UPBEAT ON LONG-TERM PRB PROSPECTS
While gas competition and other factors sapped PRB coal demand in the second quarter, producers expect the market to recover down the road. The region’s coal is the most competitive of any U.S. supply basin against gas, with its lower production costs allowing it to price more cheaply than competing bituminous coals.
“[W]hile all regions are losing demand due to low gas prices this year, we look for the PRB and Illinois Basin to rebound to higher levels than 2014 by 2017, as natural gas prices lift and higher coal plant utilization and basin switching overcome expected retirements,” Peabody President and CEO Glenn Kellow said. The PRB enjoys a “considerable cost advantage to other regions,” with electric generation about $8/MWh lower than the next cheapest supply region, the Illinois Basin, he added. Arch and Cloud Peak echoed those sentiments on their latest earnings calls.
“The PRB market in general will remain strong,” Arch President and COO Paul Lang said. “The region is not going to escape the downturn or the reduction or the rationalization of production, but I think the higher-quality mines like… Black Thunder and the other southern mines that ship higher-quality coals will do well.”
Cloud Peak said PRB producers are deploying more assets to higher-margin 8,800-Btu/lb mines in light of the soft market, but “we should not lose sight of the fact that substantial amounts of coal are going to be burned in the USA for the foreseeable future,” Marshall said. “Once demand stabilizes, it should support a smaller vital coal industry.”