FEATURE: Better H2 expected by Illinois Basin coal producers following challenging Q2

Following a particularly distressing second quarter for Illinois Basin thermal coal producers, there is some hope for a better second half of the year, although little expectation of a return to strong coal demand.

"We think the markets are approving," Brent Bilsland, president and CEO of Hallador Energy, said on the company's earnings call Aug. 8.

With Henry Hub natural gas prices expected to rise over the next year to $2.75/MMBtu, he said on the call, "that tells us coal will be dispatching in front of natural gas."

Brian Cantrell, senior VP and CFO of Alliance Resource Partners, concurred on the company's earnings call July 27, noting a significant decline of drilling activity which will push gas prices up.

Glenn Kellow, president and CEO of Peabody Energy, also provided a hesitantly optimistic outlook for coal on the company's Q2 earnings call Aug. 5.

"Just recently, we've seen an uptick in natural gas prices, and if that holds it should provide a more favorable backdrop for coal," Kellow said.

Although, he noted it also depended on if the railroads would be able to handle the increased demand.

Additionally, Arch's John Drexler, senior VP and COO, noted on the producer's earnings call July 28 a pickup in demand for coal in the Midwest given a hot summer.

However, this year has been particularly brutal to coal markets. "In the US, COVID disruptions have been coupled with extremely weak natural gas prices and growth in renewable generation, further pressuring coal demand and potentially accelerating the secular demand decline already underway," Kellow said.

Plus, according to Moody's, "most coal producers are heavily contracted in 2020 and have significant open tons in 2021, setting the stage for continued depressed pricing in the absence of further rationalization of mining assets across the industry or substantive consolidation."

Coronavirus impacts

With all the mine idlings in the second quarter, due to coronavirus concerns, IB production declined 45.3% year on year to 14 million st in the second quarter, according to Mine Safety and Health information. First and second quarter output totaled 33.3 million st, down 37.7% from the year-ago period.

Of the largest IB producers, Alliance, Peabody and Foresight had the strongest year-on-year and quarter-on-quarter declines in Q2. From Q1, Alliance declined 52.8% to 1.3 million st, Foresight dropped 43.9% to nearly 1.3 million st and Peabody was down 19.9% to 1.2 million st. From the year-ago period, Alliance was down 51.3%, Foresight 61% and Peabody 31.5%.

According to Joseph Craft, president and CEO of Alliance, the producer had to furlough more than half of its workforce during the second quarter in order to match its output with contracted deliveries this year.

Craft noted in the company's earnings call that several mines are still running at less than full capacity since the domestic spot market is limited and the seaborne market is subeconomic. He added that "consolidation is needed in our industry, and we're a willing participant in that."

"Our concerns about competitive issues in the domestic coal market are increasing," a report from Moody's Investors Services said July 27 regarding the IB. "We believe that consolidation if necessary in an industry characterized by ongoing secular decline in demand combined with near-term erosion of financial strength driven by the adverse economic impact from global impacts of coronavirus."

On the export side, shipments through the New Orleans export district, which is largely made up of IB exports, totaled over 1.7 million mt in the first half of the year, down 70.9% year on year. The second quarter, specifically, shipped 542,872 mt, down 79.3% from the year-ago period.

According to Paul Lang, Arch's CEO and president, on the company's Q2 earnings call, "anemic international pricing is preventing most US thermal producers from participating in the seaborne market in a meaningful way."