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Experts: Global natural gas oversupply likely hurting European coal pricing

SNL Image

Workers walk past large-sized LNG carriers under construction at the Daewoo Shipbuilding and Marine Engineering facility in Geoje Island, South Korea, in late 2018.
Source: Associated Press.


Global oversupply of natural gas and resulting low gas prices in Europe are likely contributing to depressed thermal coal prices in the region, which may make it more difficult for U.S. producers to compete, experts said.

While Europe has historically been a major export market for U.S. producers, that may be changing as some nations phase out coal in favor of renewable energy sources or natural gas. The price of thermal coal sold into Europe dropped significantly in recent months, which could prevent U.S. producers from competing in the market if prices hold steady, analysts have said.

Thierry Bros, a senior research fellow of the England-based Oxford Institute for Energy Studies, told S&P Global Market Intelligence that European energy and gas demand is not increasing, though it can fluctuate based on weather conditions, and the amount of each energy source needed can vary depending on the market's power-play, he said.

In Europe, that dynamic is largely a switch from coal to gas or gas to coal depending on the country, Bros said. The U.K. has been transitioning away from coal for some time and recently went a full week without using the fuel for power. Low gas prices have also provided opportunities for coal-to-gas switching in other EU nations, according to Bros.

"We see that there is an increase in the spare capacity of gas production on a worldwide level," he said, "and I think this is why gas prices are going down in Europe, and hence the coal-to-gas switching."

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Wood Mackenzie research director Mohammed Hamdaoui said coal and gas compete for the remaining energy demand in Europe outside of renewable and nuclear generation. European coal prices have recently taken a hit from renewable generation as well as low gas prices caused by plentiful Russian gas and a mild winter that reduced gas demand in Asia, he said. That caused producers to divert some LNG to Europe.

Atlantic thermal coal market suppliers are trying to move more coal to Asia as a result of low European demand, Hamdaoui said, which led to aggressive pricing and contributed to a drop in Asian steam coal prices. Given the depressed pricing and demand in Europe, U.S. coal producers "can definitely develop markets in North Africa" and should be looking for markets in Asia.

"U.S. producers have to be smart about finding the small, new markets," he said.

Given the distance to the Asian markets and the competitive advantage other nations have in their proximity, some Illinois Basin and Appalachian coal producers may struggle to find Asian destinations, Hamdaoui said, with lower-cost miners having better opportunities.

"We believe that there will be an interesting phenomenon in the mid-2020s," Hamdaoui said. "Because of the depressed nature of Atlantic markets, other producers that compete with the U.S., we're talking Colombia, South Africa and Russia, will try to chase better margins in Asia. ... We see kind of a shift in the mix of coal that will be supplied into Europe, and we see that the U.S. will be able to cover some of that."

But that could all change if European demand is destroyed and prices are too low for the U.S. to compete, he said.

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Anna Mikulska, a nonresident fellow in energy studies at Rice University's Baker Institute for Public Policy, said that while natural gas is hurting the U.S. coal sector because of its competitiveness in the market, that is not the case in Europe. Natural gas cannot compete on its own with coal prices in Europe, she said, but nations have instituted emissions credits to make less environmentally friendly fuels more expensive, making it more difficult for coal to compete than it would otherwise.

"I would not look at imported LNG as hurting coal pricing and demand," said Mikulska, who is also a senior fellow at the University of Pennsylvania's Kleinman Center for Energy Policy. "It is more of a result of policies that EU has adopted that are basically geared toward less emissions, more renewables."

Asia is the market of choice for U.S. LNG exporters, she said, but Europe became of interest, especially for spot shipments, once the Asian market softened. While there is a relatively large supply of natural gas and less demand at the moment, Mikulska said, many in the industry predict better markets over the coming decades and are building up LNG terminals as a result.

Akos Losz, senior research associate with Columbia University's Center on Global Energy Policy, projected that the natural gas oversupply is a "relatively short-term phenomenon, which will be resolved by sometime in the second half of next year." Until then, coal may be under pressure, he said, adding that Europe is the "primary export market for U.S. coal" given the limited West Coast terminal availability to more easily reach Asian markets.

The U.S. natural gas industry is ramping up capacity in a compressed time frame that even a healthily growing market would have difficulty absorbing, Losz said.

"The U.S. is the main culprit in the current energy market oversupply situation because there's just so much supply going online," Losz said. "The U.S. is playing a big role, but when it comes to this overflow of LNG to Europe ... the U.S. LNG is actually just one component of that. Russian LNG is also flowing into Europe and LNG from other parts of the world is also flowing into Europe since it's the market of last resort."