TORONTO (miningweekly.com) – Analysts of the Fitch Group-affiliated company BMI Research have revised down their US coal production contraction forecast for 2016, from 12% to 20%, citing output declining at an accelerating pace.

The firm now forecast US coal output to fall from 562-million tons in 2016, to 589-million tonnes by 2020, averaging a yearly decline of 6%.

“Our subdued growth forecast is supported by high-frequency data from the US Energy Information Administration (EIA). As of May 14, the EIA reported a 32.8% decline in year-to-date coal production, totalling only 212-million tonnes compared to 315-million tonnes over the same period in 2015,” analysts advised.

In the top coal-producing states, output was expected to continue falling at a quickening pace. According to the EIA, as of May 14, Wyoming, the largest US coal-producing state, saw coal output plummet by 30.8% year-on-year over the first four-and-half months of 2016 – much wider than the decline of 5% recorded in 2015.

Meanwhile, West Virginia, the mainstay of Appalachian coal and second-largest coal-producing state, posted a steep year-to-date drop of 36.9%, following a contraction of 14.9% in 2015.

“US coal miners will continue to rein in output and lay off workers to withstand the weak coal price environment over the next few quarters, and . . . the Powder River basin and Illinois basin are exacted to remain relatively resilient over the Appalachian basin, owing to their respective lower operating costs,” BMI advised.

The US coal industry was expected to continue to consolidate, as persistently weak thermal and metallurgical coal prices and tightening environmental regulations conspired to force firms to shed noncore assets, mothball mines, streamline operations, seek bankruptcy protection and narrow operational strategies.

BMI advised that significant coal stockpiles and competitively cheap natural gas would also weigh on domestic demand, keeping the market well supplied and contributing to expected weak coal prices over the coming quarters.

SLIMMING DOWN
Central and western US coal-producing states were expected to maintain their respective domestic market shares, supported by low operating costs and modest project pipelines over a multiyear horizon, the research firm advised.

For instance, in 2015, coal cash costs averaged $25.2/t and $30.4/t in the Powder River basin and Illinois basin respectively, compared with $39.7/t in Appalachia. As such, the slimmed-down industry would prioritise low-cost, large-scale mines with significant reserves in the Powder River basin (Wyoming and Montana) and the Illinois basin (Illinois, Western Kentucky and Indiana).

BMI pointed out that, in March and April, bankrupt coal miners Peabody Energy, Arch Coal and Alpha Natural Resources laid off 235, 230 and 37 employees, respectively, at Powder River basin coal mines to maintain profitability at key mines.

While BMI did not forecast US coal output growth to recover by 2020, low-cost producers could experience some relief by 2017, as rising natural gas prices return some domestic demand for cheaper thermal coal.

“We forecast thermal coal prices to remain subdued, edging only slightly higher to $54/t in 2020, from 51/t in 2016. Prices will remain capped due to an oversupplied global market and the shift away from thermal coal in electricity generation.

“Nonetheless, a modest recovery in natural gas prices, which we forecast to increase from $2.3 per million British thermal units (BTU) in 2016 to $3.4 per million BTU by 2020, will help rebalance the domestic market,” BMI advised.