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U.S. Coal Markets Hit Bottom

By Andrew Moore

This year will likely be remembered as the year the U.S. coal market hit bottom. Low demand led to low prices, which yielded production cutbacks, mine closures and some bankruptcies. As a result, U.S. coal production in 2015 is on target to slip to 908 million short tons, the lowest annual amount since 1986.

The market wasn’t helped by a raft of new environmental regulations, such as the Clean Power Plan (CPP), that threaten coal’s standing as the nation’s primary fuel for electricity generation.

“From a producer’s standpoint, this is a year to forget,” said Seth Schwartz, a principal at Energy Ventures Analysis, an Arlington, Virginia-based energy consultancy. “You simply can’t add up how bad this year is.”

One only has to look at prices to see why. In Central Appalachia, the price for rail-delivered 12,500 Btu/lb coal in the over-the-counter spot market has declined from an average of $57.79/ton in 2014 to an average of $43.28/ton through November 19 of this year. The price peaked at $160.60/ton in 2008.

In the Powder River Basin, the nation’s largest coal production region, the price for rail-delivered 8,800 Btu/lb in the OTC spot market has declined from an average of $11.97/ton in 2014 to an average of $10.53/ton through November 19 of this year. The price peaked at $22.65/ton in 2006.

Many factors led to the coal market’s decline in 2015. One has been the decline in exports. In 2012, the U.S. exported a record 126 million tons. The figure was largely driven by an increase in thermal coal exports, as cheap natural gas pushed excess coal overseas.

The exports were supported by higher seaborne pricing, but global oversupply has since pushed prices down. In January 2012, Platts assessed the price for thermal coal delivered into northern Europe, the CIF ARA marker, at $110.65 per metric ton (mt). As of November 19, the price has fallen to $55/mt, a 50.3% drop. Due to lower seaborne pricing, the Energy Information Administration (EIA) expects U.S. coal exports to total just 79.2 million tons in 2015, the majority being metallurgical coal. Exports have also been impacted by the strong U.S. dollar, which has made both U.S. thermal and met coal uncompetitive overseas.

But chief among the reasons for the coal market’s decline in 2012 has been cheap natural gas. The average 2015 price of the NYMEX Henry Hub natural gas futures contract through November 19 totaled $2.695/MMBtu, down 36.7% from the 2014 average price of $4.263/MMBtu. In many parts of the country, the actual gas is even cheaper. Daily prices at Dominion South, a trading hub in southwestern Pennsylvania, in the heart of Appalachian coal country, are averaging $1.506/MMBtu so far this year, compared with $3.255/MMBtu in 2014. For comparison, the average price through August of this year — the most recent data available — for delivered coal mined in Northern and Central Appalachia is $2.866/MMBtu, according to the EIA.

Blame lower natural prices on increased natural gas production. In January 2011, U.S. drillers produced roughly 57.5 billion cubic feet per day (Bcf/d). This year, production is hovering around 72 Bcf/d, according to Platts Analytics. The resulting glut of gas has made a serious dent in coal generation. The average capacity factor — the amount of time a plant is running — for the U.S. coal fleet has fallen from 67% in 2010 to 54% in 2015, according to Platts Analytics.

In sum, the EIA estimates coal will total 34.7% of total U.S. electricity generation in 2015 compared with 42.4% in 2011. The total was as high as 49.6% in 2005.

The lower utilization rates are driving the decline in generation more than coal-fired plant retirements, but retirements are a source of concern for producers. In 2015, some 13.6 GW of coal-fired generation shut down or will be shuttered by year’s end, largely due to stringent new mercury emissions standards that took effect in April 2015.

Proposed in 2011 by the Environmental Protection Agency, the Mercury and Air Toxics Standards rule was remanded back to the agency this summer by the Supreme Court, but it was too little too late, as utilities moved to retire older, less efficient units rather than spend on expensive emissions controls.

The U.S. coal fleet will total roughly 300 GW by the end of the year, but looming is the CPP. While the rule aims to start cutting carbon dioxide emissions by 2022, it faces an uncertain future due to staunch opposition from industry groups and at least 26 states, which have banded together in court to stop it. There’s also been condemnation from Congress, and a new administration in 2017 could alter the plan.

But as it stands, the CPP could result in the closure of 40-50 GW of coal-fired generation, according to Paul Bailey, a senior vice president for policy and affairs at the Washington, D.C.-based American Coalition for Clean Coal Electricity (ACCE). “The [CPP] turned out to be worse than we thought it would be,” said Bailey.

And with regards to production, the U.S. EPA’s regulatory impact analysis for the plan estimates U.S. thermal coal production could drop to 729 million tons by 2025 in its base case review, and as low as 606 million tons under a more stringent scenario.

In the near term, what is more certain is continued pressure from natural gas. Natural gas production is expected to stay flat in 2016 before increasing to 75 Bcf/d in 2017 and roughly 90 Bcf/d by 2020, according to Platts Analytics.

Increased natural gas generation will add demand, as will LNG exports, which are slated to begin in January from Cheniere Energy’s Sabine Pass terminal at a rate of roughly 0.6 Bcf/d. But, LNG exports are not likely to impact supply until further terminals come online in the next few years. By 2020, Platts Analytics forecasts U.S. LNG exports will reach nearly 8 Bcf/d. “Exports will help balance the market,” said Jeff Moore, an analyst with Platts Analytics. “I don’t think I’m willing to say prices will rebound back up to [$4/MMBtu], but I certainly think that it should help to move the price floor up a bit, and definitely tighten the market up a bit.”

Moore said his current forecast for the average Henry Hub futures price is $2.72/MMBtu in 2016, while the EIA forecasts an average price of $2.69/MMBtu.

For coal producers, 2016 could be a replay of 2015, although most of the drivers will be out of their control. “Certainly everybody assumes there will be rationalization of supply, because obviously there are lot of producers who can’t keep producing at this prices,” said Schwartz. “So really you hope for some kind of demand recovery, either higher gas prices or a weaker U.S. dollar…but you can’t count on either one of them.”

Based in Houston, Texas, Andrew Moore is the managing editor for Platts Coal Trader ; he can be reached at [email protected].