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Relief from global market far from certain for US coal

SNL Image

In this June 2, 2015, file photo, Mykola Tsukur, deputy commander of the volunteer Tornado battalion, stands atop a train carrying coking coal from the rebel-held parts of the Luhansk region into the government-controlled area.

Source: AP

With the domestic coal market saturated and analysts forecasting a continued secular decline for thermal coal, producers have been pinning their hopes on overseas buyers.

The strong export market the industry has enjoyed this year should continue at least through the first half of 2018, one analyst said, but its long-term viability is less certain.

Coal advocates in the industry and the current administration have cited the export market as a vital and necessary area for coal industry growth, including a recent initiative announced by the White House intended to bolster coal use and demand for U.S. coal abroad.

The program will be spearheaded by the U.S. Department of Energy and is intended to help foster demand for U.S. coal globally as demand for the commodity continues to wane at home.

Xcoal Energy & Resources President Jack Porco said at an industry event Dec. 5 that the export market would provide the strongest opportunity for growth for U.S. coal producers. Many producers expressed similar sentiments on recent earnings calls.

Exports have surged this year, with year-to-date shipments from the Hampton Roads port facilities in Virginia up 65.8% through November. September's total U.S. exports were the highest since March 2014.

The U.S. Energy Information Administration is forecasting a slowdown in 2018. In its most recent Short-Term Energy Outlook, released Dec. 12, it predicted a 17% decline in exports, from 89 million tons in 2017 to 74 million tons.

Porco also expects shipments to decline in the second half of the year.

Ever-shifting geopolitics plays a role in those forecasts, along with a global movement away from coal-fired generation and pressure from natural gas and renewables.

Ivan Glasenberg, CEO and executive director of Anglo-Swiss mining company Glencore Plc, said on a Dec. 12 special call that demand for seaborne thermal coal is decreasing in Europe even as it increases in Southeast Asia.

"It's not a commodity where we see big expansions in the Western countries," he said.

Porco said that unless the U.S. can help develop new markets in eastern European countries such as Ukraine and Poland, demand in the region could continue to decline, limiting export options in the future.

"I think President Trump visiting with [the Ukrainian] president certainly helps,” Dianna Ridgway, senior vice president of research at Doyle Trading Consultants, told S&P Global Market Intelligence. "The [Department of Energy] looks at where opportunities may lie, then they pass it off to the National Mining Association and the National Coal Council."

Luke Popovich, a spokesperson for the National Mining Association, said one thing the government can do to help create international demand is to persuade international lending institutions it supports to finance coal projects in emerging countries.

"That will bring reliable electricity to many parts of the globe that don't have this luxury we take for granted and at the same time can diminish the coercive diplomacy used by other foreign energy providers," he said.

Ridgway said India's proposed ban on using petcoke in cement production "lends an opportunity for us to ship coal for their cement-making process," although previous bans have proved temporary.

India is building more coal plants, she said, so a longer-term demand for coal could emerge.

Porco cautioned that government policies in Asian markets pose lingering "structural challenges" for U.S. producers. India remains an opportunity yet to fully mature, with significant potential for growing coal demand but a lack of tangible progress in recent years, he said. In China, the government's willingness to intervene in production and import efforts creates uncertainty about long-term trends.

"China's always a wild card, and India is kind of the new wild card on the block," Ridgway said.

Other opportunities may exist in Morocco. The North African country has always been a stable U.S. trade partner, but Ridgway said there is an opportunity "to foster that relationship and grow."