While the outlook for the US coal industry over the next 12 to 18 months is stable, fading utility demand in the 2020-to-2030 decade will drive the ongoing contraction of the domestic coal industry, presenting a significant challenge for US coal miners.
Last year, utilities consumed about 84% of the US coal industry’s 756-million tons of production.
A report by financial services group Moody’s states that although the impact of coal-fired power plants will be felt across all coal basins in the US, the impact will be greatest in the Powder River Basin (PRB) in Wyoming and Montana.
Profitability in the basin is already under stress, particularly in the low-heat 8 400 BTU segment of the market, with bankruptcies among major miners in recent years. Cloud Peak Energy is currently in bankruptcy, while Peabody Energy and Arch Coal have restructured their balance sheets under bankruptcy protection a few years ago.
Last month, Arch and Peabody teamed up in a joint venture in the PRB to strengthen their business position as utilities continue to move toward natural gas and renewable energy.
Moody’s states that other regions will also be hit hard, including Central Appalachia’s thermal coal market, which has declined markedly for more than a decade as low-cost natural gas exacerbated ongoing issues related to depletion and unfavourable geology. The agency says that operators that remain in that market will be hard pressed to generate positive margins.
The Northern Appalachia and Illinois Basin should fare better, especially the mines that have low cash costs or are close to coal-fired power plants that continue to operate.
The thermal coal industry is under pressure, as US power generation is shifting away from coal. Since the start of 2015, about 47 GW of US coal-fired capacity has retired, and virtually no new coal capacity has come on line. Based on reported plans for retirements, the US Energy Information Association expects another 4.1 GW of coal capacity to retire in 2019, accounting for more than half of all anticipated power plant retirements for the year.
In April, the US generated more electricity from renewable energy technologies than coal – a first for the country. Coal is expected, however, to provide more electricity than renewables for the rest of the year and next year.
Moody’s says that although the pace and magnitude of the decline in coal demand for power generation is uncertain, the closures of coal-fired power plants already announced, plus other likely closures of plants older than 50 years, will reduce coal to as little as 11% of total US power generation by 2030. This will be a substantial drop from the mid-20% contribution of coal today. As recently as 2008, coal still represented half of domestic power generation.
“We expect that new natural gas-fired generation, and to a much lesser extend renewable energy, will replace most of the thermal-coal electric generation capacity heading into retirement. We do not expect an increase in capacity factor of the coal-fired units that remain in service. This will result in a significant decline in the domestic demand for thermal coal,” the organisation says.
The US coal industry is expected to become more reliant on exports in the coming decade. Whereas exports represented about 3% to 7% of yearly coal production between 2000 and 2010, exports increased to about 15% by 2018, as power-generation demand declined, forcing producers to look for markets elsewhere.
Moody’s is forecasting that about 25% of total US coal will be exported by the middle of next year, but says that exports from US producers will remain a small portion of the global coal trade, when competing against countries like Australia and Indonesia that are geographically closer to growth markets.