The price on thermal coal sold into Pacific markets recently dropped below $75/t, signifying headwinds in a region home to several of the recent top growth markets for U.S. coal producers.

While pricing on steam coal sold into Europe declined in the first quarter and has remained low, Asian thermal coal prices have started to drop as well due to high inventories, weaker Chinese demand for coal imports and lower natural gas prices, analysts told S&P Global Market Intelligence. Should Asian steam coal prices remain low, it could affect U.S. miners' ability to sell into the Pacific market as contracts roll off.

Gregory Marmon, a Wood Mackenzie senior research analyst, said the Newcastle prompt month pricing, which tracks the price on thermal coal sold from Australia's Port of Newcastle, is at its lowest level since June 2017. He projects pricing will remain low for about the next six months, which means U.S. producers will struggle to compete in the Asian markets until winter demand heats up.

U.S. coal exports to Europe have been "out of the money for some time," Marmon said, and low Asian pricing will affect Powder River Basin shipments out of the West Coast and any Gulf Coast exports that move through the Panama Canal. Lower-cost miners in Indonesia, Colombia and South Africa, though still affected by the drop in pricing, will out-compete the U.S.

"So, this is going to further limit U.S. exports," he said.

Domestic miners' contracts in the region will be rolling off this month and next, resulting in "significant drops in exports," Marmon said. Wood Mackenzie expects U.S. coal exporters to average about 1.2 million tonnes less per month in the second half of the year from the first six months.

Lower-cost production will still be viable to export, with Northern Appalachian and Illinois Basin producers best-positioned, he said, but some of the higher-cost production will fall off. Many thermal coal producers have turned to the seaborne market, which was especially strong in 2018, to offset the lag in the domestic sector, and declining overseas prices could hurt their financials.

"It can definitely start to unsettle them," Marmon said. "They should be able to handle it until the winter demand picks up again in six months, but they're definitely going to start having problems with the exports dropping off."

Scott Schier, metals and mining analyst with Clarksons Platou Securities, wrote in an email that "there is an expectation that some Chinese domestic producers who were impacted by safety inspections may restart output soon, adding to supply." India's monsoon season may also affect purchases.

"Right now, it's just tough to make current export prices work back to the mine in the U.S.," Schier said, "though we are seeing a little more demand from the Middle East and some Asian markets than we are from European markets."

The lower Newcastle pricing will not have an immediate effect, but if conditions persist for a couple of quarters, some of the tonnage intended for overseas markets may be sold domestically and depress prices in the U.S., said Benjamin Nelson, senior credit officer and lead coal analyst at Moody's. Long-term low pricing could cause some capacity to come out of the market, especially in Appalachia, and prompt longwall miners in the Illinois Basin to throttle back.

"Atlantic prices are down, and domestic prices in Appalachia are down a little bit, so it will be interesting to see where tonnages are placed," Nelson said. "We think thermal coal is going to go through periods where it's squeezed from all directions. How long the periods last and how hard they get squeezed is still an open question."

Coal producers on the weaker end of the ratings spectrum with significant exposure to the export market, such as Murray Energy Corp. and Foresight Energy LP, may feel more of an impact from prolonged lower prices than producers on the higher end of the spectrum, such as Peabody Energy Corp., Arch Coal Inc. and Consol Energy Inc., who have more room in their financial metrics, he said. Moody's uses a $60/t to $90/t range for Newcastle pricing for ratings purposes, so Nelson said he would be more concerned about the impact on the U.S. sector if prices dropped and remained below $60/t.

"The U.S. coal industry continues to see secular decline in domestic demand that makes them more reliant on exports," Nelson said, "and as these price fluctuations happen over time, it starts to create greater [EBITDA] risk."