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Seaport lowers expectations for US coal exports in H2'19, 2020

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Seaport lowers expectations for US coal exports in H2'19, 2020

Weakening export markets for U.S. coal prompted Seaport Global Securities LLC to lower expectations for the second half of 2019 and into 2020, according to a Sept. 10 note.

Facing diminishing prospects for coal sales in the U.S. due to a secular decline in utility coal demand, producers have relied on export markets as an outlet for coal supply. Thermal coal used for generating power and metallurgical coal used in steelmaking was in relatively high demand from consumers abroad for the past several months, but the outlook for those markets is deteriorating.

Seaport Global Securities analyst Mark Levin pointed to U.S. Census Bureau data reporting that total U.S. coal exports fell 18% from June to July and 16% year over year through the first seven months of 2019.

"Somewhat surprisingly, the sequential decline was worse for coking coal than for steam coal," Levin wrote. "U.S. coking coal exports declined 28% month-over-month, while steam exports were up 1% sequentially. On a year-to-date basis, U.S. coking coal exports are now off 11%, which is much worse than we would've expected going into the year, especially when one considers benchmark met coal prices averaged $201/tonne through July."

Exports of metallurgical coal from the U.S. are annualizing to about 57 million tonnes, compared to 62 million tonnes in 2018, Levin estimated. While part of the issue is the challenge of mining metallurgical coal in Appalachia, a region increasingly fraught with geological challenges, there are also plenty of demand issues.

"The problem U.S. exporters face today is that global growth is slowing, particularly in the Atlantic Basin," Levin wrote. "While U.S. coals are slowly penetrating new markets in Asia and Africa, we think it's going to be very tough to overcome a weak Europe, an increasingly volatile Brazil and the potential for a global slowdown that impacts key Asian consuming markets. At the end of the day, steel profitability will largely dictate where met coal exports go from here, and global natural gas prices will likely play an outsized role in determining the trajectory of U.S. steam exports."

Levin wrote that in 2020, he could "easily envision" another 10 million tonnes or so dropping out of what is shaping up to be a 76 million- to 77 million-ton U.S. metallurgical coal market.