U.S. thermal coal markets were unswayed by a U.S. Department of Energy proposal to boost baseload generation during the week ended Oct. 5.
On Sept. 28, the DOE moved to limit coal demand erosion by directing the Federal Energy Regulatory Commission to issue a final rule within 60 days requiring organized market operators to implement new market rules that would allow merchant generating units with at least a 90-day fuel supply on site to fully recover their costs. While the coal sector has cheered the proposal, the rules impact on coal demand could be somewhat limited as questions linger about what constitutes 90 days' supply.
The 60-day timeline is unprecedented, and amid legal questions, Wall Street has characterized the proposal as being at odds with the nature of competitive power markets.
As the nearby month and quarter rolled forward, coal prices were mixed and prices for delivery during the 2018 calendar year were relatively unchanged.
During 2016, producers aggressively cut coal production in the face of market headwinds, including low natural gas prices and elevated coal stockpiles. Weakness in international coal markets added to domestic producers' woes as U.S. coal that otherwise would have been shipped overseas was absorbed into the nation's supply.
During the second half of 2016, the natural gas market moved higher as natural gas storage inventories increased at a slower-than-average rate. The market had approached $4/MMBtu, but a mild winter brought the market lower. Through Oct. 5, prompt-month natural gas futures are down 12.1% year to date and down 4.1% year over year to $2.923/MMBtu.
Meanwhile, prompt-month Argus/McCloskey API2 European coal index swap futures are up 7.8% year-to-date and up 19.5% year over year at $92.30/tonne.
Through the end of July, power-sector coal stockpiles were 7.2% below the 10-year average at 148.1 million tons, according to the U.S. Energy Information Administration, which estimated days of burn at 1.1% above and 13.2% above the five-year average for bituminous and subbituminous coal, respectively.
The month's 12.5-million ton stockpile draw was above the 10-year average of 10.6 million tons. Coal executives have said the market is oversupplied, and analysts are concerned about weaker-than-expected coal burn at the start of summer driven by increased competition from renewable generation.
Despite the headwinds, coal holds a narrow lead for the top spot in year-to-date generation market share through July.
The EIA has cited weak global fundamentals and low international coal prices as limiting U.S. coal exports, as "lower mining costs, cheaper transportation costs and favorable exchange rates continue to provide an advantage to mines in other major coal-exporting countries." In its latest outlook, the agency boosted its expectations for 2017 U.S. coal exports by 3.9% to 73.1 million tons. That figure is up 21.3% versus 2016, but the EIA expects 2018 exports to slide 8.6% year over year.
As of Oct. 5, the Australian dollar is 7.2% stronger year-to-date and 3.0% stronger year over year relative to the U.S. dollar, while the Colombian peso is flat relative to the U.S. dollar year over year, according to S&P Global Market Intelligence data.
EIA estimates show that coal-fired generation fell behind gas-fired generation as the nation's top provider of electricity for the first time annually in 2016, but the agency expects that trend to reverse in 2017 as coal surpasses natural gas as the nation's top generating fuel through 2018. While U.S. generation averages 11.0 million MWh/d, the EIA expects that natural gas will provide 30.9% of the nation's electricity in 2017 to coal's share of 31.3%. The government expects that power-sector coal consumption will total 684 million tons in 2017 before climbing to 708 million tons in 2018.
Longer-term projections for domestic coal consumption and production are bleak and highlight the natural gas market's and government policy's influence in both the short run and the long run. More broadly, the EIA expects coal to play a negligible role in meeting the world's growing appetite for energy in the long term.
For now, government estimates show coal production has increased year over year, with the EIA estimating coal production at 15.3 million tons for the week that ended Sept. 30. That figure is up 4.4% from the prior week and up 2.7% from the comparable week in 2016, bringing year-to-date production 12.3% higher year over year to 593.7 million tons.
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