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Buoyant coal prices prompt Moody’s to revise outlook to ‘stable’

16th November 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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VANCOUVER (miningweekly.com) – Ratings firm Moody’s Investors Service has revised the outlook for the North American coal industry to ‘stable’ from ‘negative’, despite persistent challenges facing the sector, as coal producers receive much-needed price relief, with fourth-quarter metallurgical coal benchmark prices settling at $200/t and natural gas prices hovering around $3 per million British thermal units (mBtu).

Moody's reported in a market update that, owing to thermal coal producers generally selling coal under long-term contracts, the average realisations and earnings before interest, taxes, depreciation and amortisation could continue to decline modestly in the next several months; however, Moody’s expected it to gradually improve over the next 18 months, in line with the recent pricing trends.

US PRESSURE
The US thermal coal industry will continue to face pressure from cheap natural gas and long-term regulatory uncertainty.

Although the US presidential election results increase uncertainty around the direction of government energy policies, domestic coal consumption will remain under pressure over the long term, Moody’s stated.

Natural gas and renewables will capture an increasing share of the nation’s fuel mix, smaller and less efficient coal plants will continue to be retired and coal’s share of the nation’s overall energy consumption will likely drop to the mid-20% range within a decade, from about 30% currently.

Coal producers’ earnings will be supported by the recent recovery in seaborne thermal pricing.

Newcastle and API prices approaching roughly $100 and $90, respectively, represent an increase of more than 60% from the prior year. For most miners, however, the effect on earnings will be negligible as US coal producers are only expected to export around 16-million tons of thermal coal in 2016, according to the US Energy Information Association, representing roughly 2% of production. Moody’s believes these prices will moderate once weather-related infrastructure constraints are alleviated.

Moody’s further noted that increased regulation such as the Paris Agreement, as well as anti-coal sentiment, will continue to prevent investment in new US coal capacity.

PRICE CORRECTION
Moody’s does not view current metallurgical coal prices as sustainable. “The recent upturn is attributable primarily to temporary supply disruptions and operating day restrictions at mines in China, weather events in Australia and a stimulus-driven increase in demand from the Chinese steel sector.

“While the price rally provides long-awaited relief to the metallurgical coal producers, which have endured rock-bottom prices for over 18 months, we believe that the market will normalise in the first half of 2017, bringing price levels in the range of $90/t to $120/t, based on our understanding of global cost structures and supply/demand fundamentals,” stated Moody’s VP and senior analyst Anna Zubets-Anderson.

Further, Moody’s does not foresee metallurgical coal prices returning to the lows seen in late 2015 and early 2016. It believes the US thermal coal industry has seen the bottom, owing to rising natural gas prices and rationalisation of production.

According to Moody’s, as major US coal producers emerge from Chapter 11 reorganisations, they will exert greater focus on maintaining their debt levels at a fraction of pre-filing amounts. The analyst foresees the future industry to be more consolidated post-restructuring, with better cost structures and lower leverage. Larger, more-diversified companies with conservative balance sheets following restructuring will have an advantage relative to smaller ones.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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