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OTC market: US thermal coal prices seek direction as global prices surge

U.S.thermal coal prices were mixed in the week ended Oct. 6, as near-term pricesshowed the most movement, and prices for delivery next year were nearly flat onthe week.

Asthe nearby month rolled forward, the NYMEX-spec price jumped 4.5% to$43.75/ton, while the 8,800 Btu/lb Powder River Basin product slid 1.3% to$11.85/ton. As the nearby quarter rolled in to the first quarter of 2017, the12,500 Btu/lb, less-than-1% sulfur product slid 2.5%, while the 8,800 Btu/lb PowderRiver Basin product remained flat at 11.75/ton.

Duringthe year, producers have become more aggressive in cutting coal production inthe face of market headwinds, including low natural gas prices and elevatedcoal stockpiles. Weakness in international coal markets has added to domesticproducers' woes as U.S. coal that would otherwise be shipped overseas isabsorbed into the nation's supply. As the U.S. dollar has strengthened relativeto the currency of other coal-producing nations, it has cushioned the impact offalling international coal prices on producers 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 Oct. 6,prompt-month natural gas futures are up 30.6% year-to-date and up 22.1% yearover year to $3.049/MMBtu.

Still,the market must chip away at elevated coal stockpiles for coal prices torecover. Through the end of July, power-sector coal stockpiles were 10.4% abovethe 10-year average at 171.7 million tons, according to the U.S. EnergyInformation Administration, which estimated days of burn at 25.7% above and37.9% above the five-year average for bituminous and subbituminous coal,respectively.

Meanwhile,international coal prices have climbed to new 52-week highs. Prompt-month API2swap futures are up 61.8% year-to-date and up 48.1% year over year at$77.25/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 mines inother major coal-exporting countries." In its latest outlook, the government agency raised itsexpectations for 2016 U.S. coal exports 5.9% to 58.7 million tons. That figureis down 20.6% versus 2015, and the government expects 2017 exports to slideanother 9.9% to 52.9 million tons.

Asof Oct. 6, the Australian dollar is 3.9% stronger year-to-date and 4.8%stronger year over year relative to the U.S. dollar, while the Colombian pesois 1.1% weaker relative to the U.S. dollar year over year, according to SNLEnergy data. Although the currencies of coal-producing countries havestrengthened relative to the U.S. dollar, they remain weak relative tohistorical levels.

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.

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

Amidfalling domestic demand, higher-cost production has fallen off. The governmentexpects the largest coal production decline, on both a percentage and tonnagebasis, since recordkeeping began in 1949, with the largest percentage declinescoming 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 Oct. 1, domestic coal production totaled16.7 million tons, down 6.7% versus the year-ago week, with the Appalachianregion seeing a 5.6% decline. Year-to-date through Oct. 1, total domestic coalproduction is down 22.3% to 540.2 million tons.

SNL Energy is an offering ofS&P Global Market Intelligence. Market prices and included industry data arecurrent as of the time of publication and are subject to change. For moredetailed market data, including power, natural gas and coal index prices, as well as forwards and futures, visit our Commodities Pages. Forweekly U.S. coal production data, visit our regional coalproduction data page. For foreign currency exchange rates, visit our currency exchangerates data page.