Though the U.S. Energy Information Administration recently reported that coal stockpiles as of February were at their lowest point in more than a decade, several analysts said the decreased levels are unlikely to cause a significant uptick in demand or domestic thermal coal pricing.
The administration reported May 17 that U.S. coal stockpiles fell to 98.7 million tons in February, with domestic coal-fired power plants having 90 days of burn on average at the time.
Benjamin Nelson, Moody's lead coal analyst, told S&P Global Market Intelligence that the decline in stockpiles makes sense given the shrinking domestic utility demand for coal. While low stockpiles could yield a slight benefit to producers, "you haven't seen the type of price movements that would indicate a shortage," he said.
"All else being equal, absent a weather effect or a logistics effect, each year should be a record low because there's fewer and fewer coal plants operating," Nelson said. "If your inventories are truly low to the point that they're constraining operations for customers, that should drive up pricing in a significant degree. We've seen some price escalation over time in the coal industry, but we haven't seen big spikes."
B. Riley FBR analyst Lucas Pipes said some estimates suggest the days of burn are in the mid-60s, while a year ago estimates were probably closer to the mid-70s. If the average power plant has two months or so of supply on the ground, "that's not exactly crisis levels," he said.
Lower stockpiles are a "silver lining," he said, and look "fairly normal" in proportion to the level of U.S. coal burn.
"In the aggregate, stockpiles have come a long way from incredibly high levels two, three years ago and they are more healthy now," Pipes said, "but I wouldn't say that they are down to a level where they provide an incremental benefit to demand."
Gregory Marmon, a senior research analyst at Wood Mackenzie, said that based on his company's calculations, power plants had 46 days of burn in February and about 63 days of burn currently, both of which are still "in the acceptable range."
"We don't particularly see that being overly problematic just with the price of natural gas and then the coal-fired generation demand," Marmon said. "We actually expect a slight recovery to around 60 days of burn over the summer before it declines again … by the end of the year. While there are 10-year lows, just with the lower capacity factors expected in units and the retirements of about a third of the fleet, we do think they are within the needed average days of burn."
The impact of low stockpiles is unlikely to offset the impact of low API2 pricing, the benchmark that tracks the price of thermal coal sold into Europe, should it continue over the next several months, Nelson said. While Moody's does not think exports will decline too much from 2018 to 2019 and 2020, the export market has had significant swings that "far surpass the impact of the supply and demand dynamics domestically."
There has not been a major supply response to the low export pricing because much of the seaborne thermal coal is contracted and there is relatively modest spot market exposure, Pipes said. But many producers have open positions starting in the fourth quarter, which could be affected if prices remain low over the next several months.
"If during the third quarter prices don't recover," he said, "then you'll probably see a sharper impact to fourth-quarter exports."