The federal government trimmed its near-term forecast for U.S. coal production as the sector is expected to shrink even further over the next two years due to coal's "relatively weak competitiveness in the electric power sector compared with natural gas" and lower expected opportunities for coal exports.
U.S. coal production is expected to decline 3% to 729 million tons in 2019 compared to 2018, according to the U.S. Energy Information Administration's latest short-term energy outlook. Since the EIA's last forecast for 2019, released just a month before, forecast 2019 coal production was reduced another 1.8%, or by about 13 million tons, as utilities continue to announce retirement of coal-fired power plants in the U.S. Compared to 2018 levels, coal production is expected to decline 9.9% to just 680 million tons by 2020, the first time annual production has been below 700 million tons since 1978.
Compared to the previous year, the EIA estimated that coal production fell about 3%, or 20 million tons in 2018, despite a 19 million-ton increase in U.S. coal exports and a 4% increase in overall electricity generation. While the U.S. is expected to increase the share of natural gas power used in total U.S. utility-scale electricity generation from 35% in 2018 to 37% in 2020, coal's share is expected to fall from 28% to 24% in the same period.
The agency, which often has underestimated the decline of coal and expansion of other forms of energy generation in its forecasts, also said it expects that seaborne demand will provide less cushion to U.S. coal producers as total exports of metallurgical and steam coal fall from 116.1 million tons in 2018 to 102.4 million tons in 2019 before dropping off to just 94.4 million tons in 2020.
"The United States, with excess coal production and export terminal capacity, is a swing supplier of coal to the global market," the EIA said. "When market conditions are favorable (high global coal prices, low shipping costs, disruptions in supply from other exporters, and/or increased demand from major consumers), U.S. coal exports often expand. However, exports often contract with a reversal of these market factors."
After years of declining production, coal exports from the Appalachia region increased for the second year in a row in 2018 on strong international opportunities even as production fell from other U.S. coal regions. While Central Appalachia has largely benefited from a boom in metallurgical coal demand, operators in other parts of the region have reported opportunities to increase their exports of thermal coal. However, the supply of both types of coal is expected to decline as production from Appalachia falls from 201.5 million tons in 2018 to 170.1 million tons in 2020, according to the EIA forecast.
The price of metallurgical coal had remained strong going into 2019 but began to weaken after the start of the new year, Seaport Global Securities analyst Mark Levin wrote in a Jan. 7 publication. The only way current metallurgical coal prices are likely to hold is if there are major changes in Chinese growth expectations or if there is a major global supply disruption, he added.
"So as we enter 2019, we would argue the supply side is likely to remain well contained with little incremental additions in North America and ongoing production discipline in Australia," Levin wrote. "It's the demand side, though, that worries us. If blast furnace production and utilization decline significantly on weakening end-user profit margins, the met price will feel it."
Levin projected that total coal exports will decline to 113 million tons in 2019, a significantly more optimistic outlook than the EIA's expectation that they will fall to 102.4 million tons. Levin also projected roughly flat total U.S. coal production of about 758 million tons in 2019 compared to the EIA's forecast of just 729.5 million tons.