TORONTO (miningweekly.com) – One would be hard-pressed to find optimism in today’s US coal industry, but even as the country’s exports fall and the fossil fuel’s importance in the energy mix diminishes, there are some flickers of hope for the industry, which seems to be facing ever-darkening fundamentals.
Doyle Trading Consultants (DTC) executive VP Hans Daniels told Mining Weekly Online in an interview Friday that there was currently quite a lot of pessimism in the market, with no material improved outlook on the horizon for US coal.
Last year, US coal exports totalled 74-million tons, comprising 46-million tons of steelmaking coking coal, and 28-million tons of thermal coal, which is burned for electricity generation and heating. However, for 2016, DTC currently expects coal exports to fall a further 35% and forecasts exports will fall to 48-million tons. The US Energy Information Agency (EIA) expected exports to fall to 59-million tons in a previous dated forecast.
“The challenge is that there is too much supply. It takes years for mines to come on line and now we have too many. The lag effect means that mines that looked good when the market was a lot frothier are now operating at a loss,” he explained.
So far this year, there had been a 32.5% reduction in US production. That was one of the good things, Daniels noted, adding that a lot more production would need to come off line to balance the North American market. The thermal coal side was also dealing with a supply glut, compounded by declining demand from utilities that had switched over to gas-fired power generation, spurred by falling natural gas prices and a stricter regulatory environment.
In the US, the majority of coal consumed comprised thermal coal. However, coal’s share of the energy mix was diminishing fast, compounded by declining national electricity demand. According to the EIA, coal accounted for 23.8% of the energy mix in March, and natural gas accounted for about 33%, having overtaken coal in April last year as a more important source of energy.
Daniels noted that from 1950 to about 2008, the US had seen only three periods during which energy demand declined. However, since 2008, power demand had retracted five times.
He ascribed this trend to increased efficiencies brought by technological advances, under which fell the rising adoption of solar power generation, several respective economic recessions, a decline in US industrial activity, coal-to-gas switching, and stricter environmental policies discouraging the use of coal as an energy source.
“With natural gas prices down to about $2 per million British thermal units (Btu), virtually no US coal-producing basin can compete,” he stated.
According to DTC statistics, coal had lost about 111-million tons of demand in the US over the past 12 months owing to utility fuel switching, when compared with the previous year.
There was, however, a ray of hope on the coking coal side, noted Daniels, as the premium coking coal benchmark price (FOBT Vessel Queensland) was rising after declining for the previous 2.5 years. The coking coal benchmark price rose to $84/t in the fiscal second quarter of 2016 (April to June) from $81/t fiscal in the prior quarter, the first time it rose in nine quarters. DTC expected benchmark coking coal prices to rise from 2016 to 2017, Daniels advised.
Another positive was the fact that China was getting serious about cleaning up its coal and steel overcapacity, having allocated about $15-billion to stymie the economic impact of shutting down its lossmaking mines and smelters. Since 2014, China had become a net exporter of coking-equivalent coal, with exports during the first quarter totalling about three-million tons, Daniels advised.
Daniels stressed that any hope of seeing even a partial recovery of the US coal market to its former glory would hinge on significantly more production coming off line.
“The production cuts need to continue. Coal companies have no more cash left to burn and debt holders don’t have the patience to keep lossmaking operations running,” he explained, noting that coal miners often chose to keep operating lossmaking mines for longer, owing to the cost of shutting down being far more expensive than keeping a money-losing operation running, albeit at reduced rates.
However, this came with a caveat: at 194-million tons, thermal coal stockpiles were currently at historic highs, representing enough coal to keep all plants operating for 109 days. This was rather unusual, Daniels noted, advising that many companies preferred to run with coal on the ground to maintain about 30 to 40 days’ burn. This had the potential to drive prices even lower, and to dull any eventual market rebound.
Conversely, further down the line, the market also ran the risk of taking too much production out, which could foreshadow price spikes down the line. Despite certain mines on care and maintenance having the ability to restart, Daniels believed that most of the mines now closed would remain shut, as their previous operators high-graded the deposits in an attempt to deal with falling prices, which ultimately hastened their demise.
A return to normal weather patterns could also prove to be a godsend to the US coal industry, as the unusually mild past winter exacerbated the thermal supply glut.
Further, another positive for coal was an expected price increase for natural gas to about $2.90/Btu in 2017, as a result of more supply coming offline.
Daniels noted that the strong greenback was further harming the export market for the local coal-mining industry, while proving to be a boon to exporting producers outside of the US, which sold their product in US dollars and whose expenses were denominated in weaker local currencies.
According to Daniels, the spate of coal bankruptcies seen in recent months was merely a symptom of the changing US coal market landscape. Technological advancements in natural gas production were the overarching threat to the coal industry’s recovery and had disrupted the fundamentals. While tightening regulations were onerous and raised the cost of mining and burning coal, the real threat remained natural gas, emphasised Daniels, noting that it was not going to get any easier in the future.
Daniels will be one of the presenters at this year's Coal Association of Canada 2016 Conference, scheduled to take place in Vancouver between June 8 and 10.