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Experts do not foresee big spending from coal industry in 2019

While U.S. coal producers are hesitant to invest in new capacity at the moment, several industry professionals said at a recent energy event that they do not foresee widespread consolidation any time soon.

Michael Bauersachs, president and CEO of Ramaco Resources Inc., said that in a "difficult environment" where the sector's share prices are undervalued and investors are unwilling to take on debt, substantial mergers and acquisitions are unlikely.

"Now should it happen is a different question," he said during a panel Jan. 31 at the 19th Coaltrans USA conference in Miami. "In particular on the steam side, I think you could make the case that substantial consolidation makes a lot of sense. It makes a lot of sense in the Powder River Basin because nobody is making any money at all there."

Clarksons Platou Securities analyst Jeremy Sussman said boards are "uber sensitive to take on risk," something he doesn't foresee changing in 2019. Many investors were creditors who inherited their positions from coal bankruptcies, he said, and are not looking for growth at this point.

Banks also are hesitant to invest in capacity. While many banks refuse to fund thermal coal projects, "the vast majority will at least be willing to take a look at met coal," Sussman told S&P Global Market Intelligence in an interview.

"Compared to where it was when I began my career in 2006, it's still a small fraction of what banks were willing to give out back then," Sussman said. "Access to capital as a whole is still very, very tight."

Bauersachs said securing financing is more difficult now than at any other time in his three decades in the industry.

"This is a totally different type of atmosphere than I have seen. We've even seen private equity kind of stand to the side and not do much," he said. "I think with some of the environmental concerns, which obviously most of us in this room don't agree with, but with large U.S. banks I mean it's virtually impossible to do any business with them."

Matt Schicke, chief commercial officer of Corsa Coal Corp., said companies are not investing much money in their capital base, largely because of the "challenging times" the sector has faced the last three or four years. The lack of investment could yield subsequent rounds of consolidation and restructurings, he said.

"It can create a real challenge if there's a market downturn," Schicke said.

Another Ramaco Resources executive projects the sector will not look toward consolidation for about two more years as it waits for the markets to settle down. Until those investors who lost big in the last downturn get their money back, "you're really not going to see too much new money come back into the space," CFO and director Randall Atkins said.

"The way I look at the market today is you have a whole lot of institutional investors, a whole lot of banks that lost a whole lot of money," Atkins said.

Jonathan Rose, head of the metals and mining Americas division at Deutsche Bank Securities, said recent mergers and acquisitions were "more situation-specific" and subsequent movements in the sector will be "relatively slow." Further consolidation or acquisitions will likely occur because of specific opportunities rather than a wave across the industry, he said.

Consolidation will eventually be inevitable, Sussman said, because without investment in new capacity, supply growth will be "extremely limited." He projects metallurgical coal pricing will remain well above the cost of marginal production for the foreseeable future, while thermal coal demand will continue to decline domestically.

"It's a waiting game," he said. "It's about keeping a lean balance sheet and just hunkering down and generating cash and in most cases trying to return that cash to shareholders."


Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

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Coal Forecast Surging Export Volumes Aid Coal Production As Gas Competition Tightens

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Higher export volumes aid coal production as gas competition tightens domestically

Jul. 20 2017 — Coal production made gains through June as modest electricity demand to open the summer was offset by stronger exports. Weekly shipments for June came in 24% higher than the same period last year, continuing the improved production results for 2017. However, easing natural gas prices during June provided little headroom for thermal coal prices. The NYMEX CAPP eased by $0.25/ton (0.5%) for the month, while the NYMEX PRB gained $0.24/ton (2.2%).

Natural gas prices traded lower during June than in May, with low electricity demand doing little to clear surplus storage. After opening the month at $3.05/mmBtu, Henry Hub spot prices varied during mid-month from $2.85-3.12/mmBtu, before closing at $3.07/mmBtu. Natural gas remains in a moderate surplus, with June injections trailing modestly below historical averages. Storage levels as of June 23 stood at 2,816 Bcf, 182 Bcf above five-year averages. The surplus restrained natural gas markets during the month, with warmer weather the last week of June kicking off the cooling season and providing a boost to prices.

Coal inventories remain in surplus as well, with April stockpiles growing to just over 166 million tons, 9.3% above normal. The growth in inventory corresponds to estimated displacement of coal from natural gas generation resulting from Henry Hub prices declining by 20 cents per mmBtu. Looking ahead to the summer season, robust cooling demand could add 1.5 million tons per week to production, which would drive coal production to levels not seen since the summer of 2015. For the four weeks ending June 24, coal shipments averaged 15.5 million tons, as demand into the summer season picks up. Production levels continue to improve overall, about 24% higher than the same period last year. Inventories remain above normal, and low electricity demand shoulder season may do little to clear them, tending to keep a lid on prices.

Higher natural gas prices have boosted coal demand for the first half of 2017, especially compared to the dramatic loss of demand that occurred during the first half of 2016. However, surpluses linger in both the coal and natural gas markets going in to summer. If electricity demand remains low, growth in coal production could taper during the peak season.

On the improved demand picture for the year, the CAPP and NAPP coal regions are projected to beat 2016 production levels. A firmer natural gas strip, easing coal retirements during the year, and stronger seaborne metallurgical markets all contribute to the improved outlook. The markets for Illinois Basin and Southern PRB are also projected to rebound by 44 million tons this year on improved price competitiveness.

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