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Moody's sees negative outlook for coal sector; US exports drop 18.1% YOY

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Moody's sees negative outlook for coal sector; US exports drop 18.1% YOY

Weakened international coal prices coinciding with open 2020 contract positions for some U.S. producers led Moody's Investors Service to adjust its outlook on the coal sector from stable to negative this week.

Moody's expects that U.S. coal producers will see a 3% decline in EBITDA over the next year as the market limits export opportunities and the steel industry weakens.

"A confluence of economic, environmental, and social factors also increase our concerns about the industry's longer-term demand prospects, as pressure on the industry is mounting, which makes numerous coal mines uneconomic in a reduced demand environment, especially smaller, higher-cost mines that are highly vulnerable to retirement of specific coal-fired power plants," Moody's analyst Benjamin Nelson wrote in an Aug. 21 note.

Second-quarter exports overall decreased about 18.1% year over year through ports largely serving various basins had mixed results. Coal terminals in Norfolk, Va., the nation's largest coking coal export point, saw a 28.2% drop in shipments to the international market from the year-ago period. But an Alabama port that also ships a significant amount of coking coal exported 35.4% more coal year over year. The Port of New Orleans, which largely exports thermal coal from the Illinois Basin, took a 35.5% year-over-year blow in its export coal tonnage during the period.

Despite the decline in the international market and the effect it is already having on producers' exports, some companies are optimistic the market will rebound and are looking more at the long-term picture.

"We think that markets are overall pretty well-balanced," Arch Coal Inc. CEO John Eaves said. "... We feel very confident that with our cost structure, our quality and our balance sheet, [we are] able to manage through these dips and really capitalize when they move up."

Others in the industry are working to deal with issues arising from the declining sector. The new National Coal Transportation Association executive director told S&P Global Market Intelligence recently that he intends to expand the organization's focus from primarily coal and the railroads to the transport of other commodities aligned with the coal sector. He also noted that the association is looking at ways to maintain the aging fleet of coal cars rather than building new ones.

The Washington State Court of Appeals dealt a blow to a proposed coal export facility that would connect western coal producers to the export market this week. The court vacated a superior court's decision and sided with the state and environmental groups on the former's reasoning for denying the company intending to build the terminal a sublease on state-owned aquatic lands.

A representative from Millennium Bulk Terminals-Longview LLC, the company planning to build the terminal, said it will explore its options, legal and otherwise, to move the project forward.

U.S. coal producers in the east produced more coal during the recent period than in the second quarter 2018, while western producers' output dropped from the year-ago period. Total output in the Powder River and Uinta basins dropped year over year while the top 25 mines in Northern Appalachia and Central Appalachia produced more of the fuel during the period.

There were several recent developments in the bankruptcy courts as well. The Navajo Transitional Energy Co. LLC will become the third-largest U.S. coal producer based on production volume after purchasing Cloud Peak Energy Inc.'s Powder River Basin coal mines through its bankruptcy auction sale. The Navajo company estimates the mines will generate more than $1 billion in annual revenue. The entity will take over the mines free and clear of prior debt burdens.

In Blackjewel LLC's bankruptcy case, a subsidiary of Rhino Energy LLC entered into an agreement with the debtor to purchase three of its underground mines in Virginia, as well as other assets. The deal is subject to bankruptcy court approval.

Upcoming events

National Coal Transportation Association: NCTA will hold its 45th Annual Business Meeting and Conference Sept. 9-11 in Baltimore.

National Coal Council: The NCC will have its annual fall meeting Sept. 11-12 in Washington, D.C.

Southern States Energy Board: SSEB is having its 59th Annual Meeting Sept. 23-25 in Louisville, Ky.

North American Export Coal and Gas Summit: The event will take place Oct. 2-4 in San Francisco.