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OTC market: Coal prices mixed on week even as stockpile falls

Coalprices moved mixed in the week ended July 21, as analysts looked to lowernatural gas prices but also a decline in coal stockpiles.

Accordingto FBR & Co., U.S. coal stocks decreased 10 million tons in June to 185million tons on sharply higher coal burn of 64 million tons versus shipments of53 million tons.

"Overall,we were encouraged by the drawdown in the beginning of the summer season, ascoal burn exceeded our expectations slightly and shipments were in line,"FBR & Co. analyst Lucas Pipes wrote in a July 20 research report."We currently project that inventories will end the year at 160 million to165 million tons, assuming that current natural gas futures prices hold andthat coal production levels are about 11% above the most recent weeklyproduction level (after the most recent weekly EIA coal loadings data showed arenewed decline). We maintain our view of gradually improving thermal coalfundamentals over the remainder of the year."

Prompt-monthcoal prices were flat to lower with the 12,500 Btu/lb., less-than-1% sulfurproduct and the 8,800 Btu/lb. Powder River Basin product down 0.6% and 4.4%,respectively, while the former found a little more support further out withprompt-quarter and 2017 strip CSX/rail prices each up 1% on the week. However,the 8,800 Btu/lb. Powder River Basin product extended losses further out withprompt-quarter prices down 3.0% and 2017 strip prices off 1.1%.

Duringthe year, producers have become more aggressive in cutting coal production in the face of market headwinds, includinglow natural gas prices and elevated coal stockpiles. Weakness in internationalcoal markets has added to domestic producers' woes as U.S. coal that wouldotherwise be shipped overseas is absorbed into the nation's supply. As the U.S.dollar has strengthened relative to the currency of other coal-producingnations, it has cushioned the impact of falling international coal prices onproducers that operate outside the U.S.

Lately,however, the natural gas market has shown strength as natural gas storageinventories have been climbing at a lower-than-average rate. Through July 21, prompt-monthnatural gas futures are up 15.3% but down 4.4% year over year to $2.692/MMBtu.As natural gas prices have weakened, coal stockpiles have grown.

Still,the market must chip away at elevated coal stockpiles in order for coal pricesto recover. Through the end of April, power-sector coal stockpiles were 19.0%above the 10-year average at 196.2 million tons, according to the U.S. EnergyInformation Administration, which estimated days of burn at 24.7% above and34.4% above the five-year average for bituminous and subbituminous coal,respectively.

Meanwhile,international coal prices are falling in line with year-ago levels.Prompt-month API2 swap futures are up 19.5% year-to-date but down 2.5% yearover year at $57.05/tonne.

TheEIA has cited weak global fundamentals and low international coal prices aslimiting U.S. coal exports, as "lower mining costs, cheaper transportationcosts and favorable exchange rates … continue to provide an advantage to minesin other major coal-exporting countries." In its , the government agencylowered its expectations for 2016 U.S. coal exports 10.9% to 59 million tons.That figure is down 20.2% versus 2015, and the government expects 2017 exportsto slide another 6.9% to 54.9 million tons.

Asof July 21, the Australian dollar is 3.1% stronger year-to-date and 1.7% strongeryear over year relative to the U.S. dollar, while the Colombian peso is 4.7%weaker relative to the U.S. dollar year over year, according to SNL Energy data.

Amida weak U.S. coal export outlook, the EIA expects that coal-fired generationwill fall behind gas-fired generation as the nation's top provider ofelectricity for the first time annually in 2016. Amid stronger natural gasprices, the U.S. government raised its short-term outlook for power-sector coaldemand to 674 million tons in 2016, up 0.9% versus the .

Longer-termprojections have U.S. coal consumption and production whether or not carbonemissions limits are enacted.

Coalproducers are struggling to balance running their operations efficientlyagainst maintaining market share, and higher-cost production has fallen off.The government expects the largest coal production decline, on both apercentage and tonnage basis, since record keeping began in 1949, with thelargest percentage declines coming out of the western U.S. and Appalachia.

EIAcoal production estimates show that all coal-producing regions are being hit bythe weak market. During the week ended July 16, domestic coal productiontotaled 15.1 million tons, down 13.8% versus the year-ago week, with theAppalachian region seeing a 17.7% decline. Year-to-date through July 16, totaldomestic coal production is down 27.1% to 358.5 million tons.

Market prices and included industry data are current as ofthe time of publication and are subject to change. For more detailed marketdata, including power, natural gas and coal index prices, as well as forwards and futures, visit our Commodities Pages.