The U.S. coal sector should remain stable for the next 12 to 18 months, Moody's said in a June 3 note.
While thermal coal production is expected to continue to fall in the wake of significant coal-fired power plant retirements in 2018, prices remain favorable for most producers, Moody's said. The price of metallurgical-quality coal used in steelmaking has supported producers in recent months, but that market can be volatile, and longer-term concerns around economic, environmental and social factors weigh heavily on the broader sector.
"As U.S. power generation moved away from coal, some producers responded by reducing their domestic emphasis and exporting more thermal coal," Moody's said. "But this shift is not sustainable through a full commodity-price cycle because delivery costs to reach distant markets such as China and India will make exports less profitable, if not unprofitable, when pricing eventually does retreat, forcing producers to sell to domestic customers at lower prices, or cut production."
Moody's anticipates "further modest retirements" of coal plants based on announced plans for 2019 and 2020 but said the pace and magnitude of retirements beyond that date remain uncertain. With the power sector accounting for more than 90% of U.S. coal consumption, production will "continue to erode rapidly."
"The export market for thermal coal has increased again in recent years, and higher met coal prices mean that some crossover tons with met-like characteristics can be placed into the met export market," Moody's said. "Even so, we do not expect these opportunities will be strong enough to offset the anticipated decline in demand from power customers and our concern is growing that retirements could accelerate once again at some point in the early 2020s."
The Powder River Basin is particularly vulnerable. The sparsely populated region produces low-sulfur coal that must be shipped relatively long distances and can be used by older coal plants without scrubbers, but those are being replaced by new gas-fired generation, Moody's said. Pure-play Powder River Basin coal producer Cloud Peak Energy Inc., for example, is going through a bankruptcy reorganization.
On the other hand, Northern Appalachia coal producers such as Contura Energy Inc. and Consol Energy Inc. are well-positioned with thermal and metallurgical coal reserves and relatively easy access to export markets. Producers in the Illinois Basin such as Alliance Resource Partners LP and Foresight Energy LP are also expected to fare well in 2019 thanks to the ability to export high-sulfur, high-heat coal, Moody's said.