Oct. 28 2018 — U.S. coal producers are going deeper into export markets to offset the decline of domestic thermal coal volumes, which have dropped about 24% since 2015. S&P Global Ratings assumes that U.S producers will export about 60 million short tons of thermal coal in 2018 and that without those exports volume would have declined 33% since 2015. Exports have proven critical to coal producers as domestic power plants, which increasingly use natural gas for fuel, have sharply cut their coal purchases, leading to deteriorating credit metrics, disappearing profits, and in some cases bankruptcy for coal companies over the past few years. Even though credit quality is stabilizing due to conservative financial policies post restructuring and growth in export sales, access to capital is waning, particularly for thermal producers.
Power companies switching to natural gas and the retirement of coal-fired power plants are the key reasons for the decline in domestic coal consumption. We believe that the domestic energy portfolio will continue to migrate toward natural gas and renewables given scheduled coal plant retirements and the growing state and local preference for green power production. We see this happening even as we acknowledge that coal, although declining in use, will remain the second-largest source of electricity.
We anticipate the average adjusted debt will continue to decline in 2018 and 2019 for our U.S. rated companies, largely because they are using some of the cash flows generated in the export market to repay debt. We also assume a 40% hike in average capital spending in 2018, as U.S.-based issuers resume key replacement and rebuild programs that were put on hold in 2017. Financial policies are conservative and focused on shareholder returns in the form of dividends and share repurchases. The coal producers in the best position to benefit from exporting will be those with the most high-quality in-demand types of coal, prudent financial policies that manage foreign currency risk, and strong transport options to get their coal from domestic mines to foreign markets. Moreover, despite the growth of natural gas and renewable sources for power plants both domestically and internationally, we expect that traditional export markets for thermal and metallurgical (met) coal in Europe and Latin America will remain strong over the next 12 months, while coal exports to Asian markets, including India, will increase slightly.