Continued firm export markets combined with higher steam coal demand pushed coal deliveries to peak levels to close out 2018, setting up brighter prospects for the first quarter of 2019. Natural gas prices eased from their weather-driven highs of late November 2018, likely putting natural gas back in a competitive range versus coal plants until the next cold snap. Export markers saw the most price movement: the NYMEX CAPP benchmark was again flat for the month, while physical CAPP 12,500 Btu per pound gained $2.45/ton (3.0%). NAPP Pittsburgh Seam 13,000 Btu per pound similarly gained $1.90/ton (3.0%) on sustained export market momentum. Illinois Basin markers were flat, and NYMEX PRB declined by $0.05/ton (0.4%).
After a wild bout of winter weather in the heating-season regions of the Northeast and Midwest, strong supply and easing temperatures brought natural gas prices down by the holidays. While deficits of natural gas in storage remain high, falling demand brought about the first drop in the deficit since early November 2018. Henry Hub spot prices opened December 2018 at $4.61/MMBtu, peaking during the first week at $4.70/MMBtu before falling off rapidly to close the month at $3.10/MMBtu. The natural gas storage deficit similarly shrank from 725 Bcf at the end of November 2018 to 562 Bcf as of Dec. 28, 2018. While prices have eased significantly, stronger natural gas pricing in October 2018 and November 2018 should support greater spot activity in early 2019 even if weather remains moderate.
Demand markets for natural gas largely followed Henry Hub's downward movement, putting natural gas competition back in play in key coal-using regions. Chicago traded 24 cents below Henry Hub, while TETCO M3 averaged at a 2 cent premium on damp Northeast weather. Marcellus points traded 27 cents below Henry Hub. The persistence of these regional discounts indicates that high availability of natural gas supply looms over the market. Natural gas markets remained tight in the West during December 2018, with SoCal Border running 86 cents above Henry Hub.
Coal inventories built seasonally in October 2018, with the Energy Information Administration estimating stockpiles at 105 million tons. Taking into account reduced burn and coal retirements, S&P Global Market Intelligence estimates normal year-end stockpiles at 137 million tons, with a building of inventories likely to occur over the next two months.
The chart below shows the current price forecast for the PRB 8800 and 8400 markers.
Low-priced natural gas in shale-influenced regions of the West, Midwest and Texas has tended to restrict coal usage, flattening pricing for the Powder River Basin, or PRB. The recent increases in natural gas prices discussed above have not translated to structural increases in forward pricing, indicating ongoing price pressure over the next three years. For instance, summer 2019 natural gas is priced at $2.80/MMBtu and summer 2020 drops to $2.50/MMBtu, while long-haul PRB is resilient to gas generation priced from $2.85/MMBtu to $3.00/MMBtu. Mostly flat prices for PRB are projected as higher demand from exports is more than offset by competition from natural gas and by coal plants scheduled to retire over the next two years. These factors create surplus production capacity in the PRB, tending to reinforce current price levels over the next few years.
With stockpiles now at normal levels for the year, bituminous markets increasingly rely on firm seaborne markets to sustain demand into 2019. Year-over-year export volumes have held strong, allowing prices for export-ready coal and metallurgical coal complements to remain strong into the fall.
The above chart forecasts declining prices across bituminous coal types as current export demand eases and pricing pressure from natural gas builds in 2019 through 2020. As with the PRB, ongoing low natural gas prices creates a ceiling for coal prices, tending to limit steam coal price growth. S&P Global Market Intelligence projects that the combination of natural gas prices and coal retirements will pressure generation demand through 2022, with overall demand falling by 211 million tons from 2017 to 2022.
Coal production, demand
For the four weeks ending Dec. 22, 2018, coal shipments averaged 15.3 million tons, comparable to December 2017. Exports holding firm through the second half of 2018, these higher volumes (23 million tons higher) offset losses due to coal retirements and competitive natural gas (69 million tons lower) to drive estimated production for 2018 of 764 million tons, just 10 million tons less than 2017.
The chart below compares the current production forecast with recent history. Electric-sector demand is projected to decline from 606 million tons in 2018 to 537 million tons in 2019, coming under additional pressure through 2022. Announced coal retirements over the next four years combined with lower natural gas prices are projected to push coal generation demand to a low point of 427 million tons per year. The overall coal market (domestic demand and exports) is projected to decline by 249 million tons from 2017 to 2022. While coal retirements create a ceiling on domestic steam coal demand, potential displacement by natural gas creates year-over-year volatility in demand. The persistence of low natural gas prices creates a constant threat of coal displacement, but higher natural gas prices could conversely preserve 40 million to 80 million tons of demand projected to be lost at current price projections.
Production outlook — Powder River Basin
The PRB faces the most direct pressure on volumes from natural gas competition and experienced additional pressure due to retirement of coal plants in Texas during 2018. As a result, total PRB production (Northern and Southern) for 2018 is forecast at 333 million tons for 2018, a modest decline from 2017 levels. Further retirement of coal generation in the Midwest and Texas, along with lower natural gas prices, is projected to shrink the market through 2022. Modest growth opportunities include displacement of smaller western coal producers along with further expansion in export markets. Recent strengthening of natural gas prices may keep more tons in the market this winter. Overall, PRB is forecast to reduce production by 7 million tons in 2018 before losing an additional 34 million tons in 2019.
Production outlook — Illinois Basin
Demand pressure from competitive natural gas through the first half of 2018 was more than offset by higher export volumes, allowing production levels to grow. S&P Global Market Intelligence forecasts 2018 Illinois Basin production at 108 million tons, nearly 5% higher than 2017. As in other coal regions, natural gas prices are expected to move further downward by 2019, with shale gas deliverability into the Midwest pressuring Illinois Basin coal volumes. Illinois Basin production is projected to fall to 100 million tons per year in 2019 and reach a bottom of 87 million tons in 2022.
Production outlook — Appalachian basins
Appalachian basin coal production has increasingly shifted to metallurgical and export steam markets, with long-haul thermal domestic markets continuing to erode. Strong seaborne thermal coal pricing has supported production levels throughout the year, especially in central and southern Appalachia. While export markets are projected to ease in 2019, fourth-quarter pricing is likely to support exports through the end of 2018. Many coal plants will cease operations in 2019 and more appear to be under pressure due to the favorable economics of natural gas. S&P Global Market Intelligence projects total production at 207 million tons, a 4% increase over 2017. Exports of thermal and metallurgical coal ease slightly in 2019, which, combined with retiring coal generation, is expected to reduce production by 22 million tons.
Coal forecast methodology overview
Market-indicative coal forecasts produced by S&P Global Market Intelligence represent forward curves for spot-traded instruments, analogous to a strip of contracts, with the shorter tenors (current year, prompt year, plus additional years if available) driven by the observed/assessed market and the longer tenors (typically years 3-20 for physically assessed markers and NYMEX futures) driven by fundamental estimates of cash costs of production, accepted returns to capital, regional productive capacity, and forecast supply and demand. For the long-tenored portion of the curve, S&P Global Market Intelligence forecasts prices for specific coal markers and defines the remaining markers via historical spreads.