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Q3 quotes: US miners expect utilities are getting hungry for coal

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Trucks transport coal at Cloud Peak Energy's Antelope mine in September 2017. The coal company has been struggling with adverse mining conditions created by heavy rains over the summer as tepid utility demand for Powder River Basin coal keeps a lid on prices.
Source: S&P Global Market Intelligence

U.S. coal executives reported positive indicators for both international and domestic coal markets going into the last months of the year as the supply of coal tightens.

For the past several quarters, the sector has reported success in placing thermal and metallurgical coal into markets abroad. Now, many producers are optimistic that customers in a persistently declining domestic utility market could soon be seeking coal at a time when export opportunities and a hesitancy to put capital into new U.S. mines has made coal more scarce than in past years.

S&P Global Market Intelligence listened to a wide range of coal earnings calls for the third quarter and compiled some of the comments made on those calls. The standout quotes are in italics below.

Utilities in the market for coal

Higher-than-average temperatures have increased power load and forced utilities to draw down inventory levels more than expected, reported Hallador Energy Co. President and CEO Brent Bilsland. He said the Illinois Basin coal mining company grew its customer base from nine to 15 this year as utilities in Alabama, Georgia, Indiana, North Carolina and South Carolina began buying coal.

"There seems to be a willingness from utilities to once again transact in multiple-year contracts," Bilsland said. "The export market has sucked a lot of capacity out of the U.S. ... I think [the increase in customers] speaks volumes about this market, the strength of it and how our product is traveling to locations it's never traveled to before."

Consol Energy Inc. executives reported that in negotiations with utilities, they are obtaining better prices and longer contracts, giving them the security of knowing the coal they plan to mine in future years will find its way to customers.

"Our customers continue to seek coal to replenish stockpiles in the near term while also committing to longer-term contracts for 2019 through 2021," Consol President and CEO Jimmy Brock said. "The pricing for new contracts has been coming in better than the pricing for the contracts that are rolling off. … With low domestic coal inventories and a strong export market, we are very comfortable with our prospects to contract and optimize our portfolio."

US thermal demand still low

Peabody Energy Corp. President and CEO Glenn Kellow reported that with utilities less contracted than usual, higher natural gas prices and declining stockpiles of coal, the company is expecting to see the benefits of improving coal fundamentals. However, he was also cautious and added that the company, which has significant exposure to metallurgical coal through its Australian operations in addition to its large thermal coal mines in the Powder River Basin and other U.S. operations, is monitoring the market and would only look to contract if the margins would be acceptable to Peabody.

"I think we should take the five-year picture that the overall market is in decline," Kellow said of the Powder River Basin. "But 2018 ... was probably the biggest year of that in terms of [power plant] retirements. How we see it playing out is purely going to be a function of GDP. And gas prices and weather conditions will determine what that movement is going through into 2019."

While Arch Coal Inc. reported the strongest quarter of EBITDA since its emergence from a bankruptcy reorganization, that was largely on the company's robust coking coal performance and sales of thermal coal into seaborne markets. As other producers suffered from heavy summer rains, the company was able to produce significant tonnage from Black Thunder, its large thermal coal mine in the Powder River Basin. Still, Arch COO Paul Lang said utilities have remained "very comfortable with letting their inventories drop."

"I think, unfortunately, particularly [in the Powder River Basin], they see a lot of coal out there and they don't really see any issues on delivery," Lang said. "Now the flip side of that is, we get in this debate constantly about where is this new norm for inventory. And look, the inventories are correcting; at some point, things will have to start picking back up. But right now, I don't see a lot of pressure on the side of utilities."

Coal supplies are tight

If there is a surge in demand for coal, there could be few producers with the capacity to respond, several producers suggested.

"Production is coming in short of that demand, and so we're trying to fill that gap both domestically as well as internationally," Alliance Resource Partners LP President and CEO Joseph Craft III said. "As we look at our competitors, most of our competitors are already operating at their full capacity. We don't see anybody talking about putting in new coal mines and neither are we, with the one exception in East Kentucky."

Despite success exporting coal, Cloud Peak Energy Inc. President and CEO Colin Marshall said the company still has not seen U.S. pricing levels that would justify putting new capital into its Powder River Basin coal mines.

"For us, the rising strip ratios and hole distance means that the amount of coal we can produce this year is less than we could have produced, say, three or four years ago," Marshall said. "In terms of how much could you actually squeak out over a short period or over a year compared to your plan, there's normally a bit of flexibility, but generally not that much. And until I guess you're actually tested by demand rising, you don't know."