US coal miners find mixed results in hunt for longer-term contracts, certainty

Coal miners have had some success in moving away from very short-term deals with power producers, but longer-term deals with three or more years remaining in the term dwindled further in 2023, adding to the challenges facing the already diminished sector, S&P Global Market Intelligence data shows.

Long-term contracts have been fading from the industry for more than a decade as regulatory changes have made it more difficult to burn thermal coal, and alternative resources offer cleaner or cheaper forms of energy.

The sector saw the volume of coal deliveries with more than five years remaining in the contract term tick down even lower, from 7.4% in 2022 to 5.1% in 2023, a sharp contrast to as recently as 2010 when 19.8% of coal deliveries arrived at power plants with more than five years remaining in the term. The amount of coal delivered with remaining terms of greater than three years but less than five years also fell from 10.1% to 5.2%.

In a rare bright spot, coal miners saw some increase in medium-term contracts, with 34.0% of the coal volumes delivered to power plants in 2023 arriving on contracts with more than a year but less than three years remaining on the term, compared to 24.1% in 2022.

"Long-term contracts with power generators are key — without them, many miners are reluctant to make significant investments in ramping up production without an assured buyer down the road," said Ashley Burke, senior vice president of communications for the National Mining Association. "One of the things we believe will change this trend is the exploding electricity demand due to [electric vehicles], AI and massive datacenters that have placed us firmly in an era of generation addition, not replacement."

The percentage of contracted coal arriving at power plants with less than a year remaining in the term has been marching upward, from 27.9% in 2013 to 44.3% in 2022, before retracing slightly in 2023 to 42.4%. More than half of 2023 coal deliveries showed up at power plants on contracts with less than a year remaining in the term or as the result of spot deals.

Without long-term contracts, investments in equipment, people or other assets are riskier propositions for a sector that already struggles to raise outside capital. Power plants traditionally benefited from the assurance of a consistent and affordable coal supply written into a longer-term contract. But supply has been relatively abundant as demand retracts, and plant owners have avoided long-term commitments.

That makes investing more challenging for miners.

"Current conditions in the coal industry may make it difficult for our lessees to extend existing contracts or enter into supply contracts with terms of one year or more," Natural Resource Partners LP, a company that leases properties to coal miners, warned in a May 7 securities filing. "Our lessees' failure to negotiate long-term contracts could adversely affect the stability and profitability of our lessees' operations and adversely affect our future financial results. If more coal is sold on the spot market, coal royalty revenues may become more volatile due to fluctuations in spot coal prices."

And the decarbonization of the US electric grid will only exacerbate those challenges, as the nation's coal power fleet rapidly retires.

As of a December 2023 analysis, US utilities had plans to shutter, by 2035, 62.1% of the coal-fired generation that existed prior to 2015. A February analysis of fuel contract data and retirement announcements showed more than a third of US coal production in a recent 12-month period was destined for power plants set to retire by 2042.

"Regarding coal, the short-term sales contracts favored by some of our coal customers leave us more exposed to risks of declining coal price periods," US coal producer Alliance Resource Partners LP said in a quarterly securities filing posted May 9.

Peabody Energy Corp.'s sensitivity to market pricing depends on the duration of the contracts with its customers, the company said in a filing the same day.

Longer-term utility contracts could return, if and when utilities find themselves in need of their coal fleet due to energy-intensive technologies such as artificial intelligence or datacenters, Timothy Whelan, senior vice president of sales and marketing at Alliance Resource Partners, said during a March 21 panel at CERAWeek by S&P Global.

"That's because we need that commitment," Whelan said at the event. "If you need us to be there, we need that commitment."

At least one company seems to be securing some longer contracts.

Executives of Consol Energy Inc. touted the company's success in securing long-term contracts as one of the core tenets to building long-term value, in a May 7 investor presentation covering the first quarter.

"In the domestic front, despite the near-term coal demand weakness due to mild weather, there are long-term indicators for potential growth in domestic coal-fired generation demand," President and CFO Mitesh Thakkar said on the May 7 call.

"Consistent with these domestic demand trends, we recently completed a fixed price three-year term deal in the domestic market for 950,000 tons running from 2026 through 2028," Thakkar said. "We are also currently in negotiations with another domestic utility for a long-term fixed-price deal."