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Global thermal coal prices to drag on US producers in 2020 as hedges roll off

As the coal sector wraps up its second-quarter earnings calls and moves through the third quarter, experts are projecting that international thermal coal prices may weigh on the sector later this year and perhaps more heavily in 2020.

Many U.S. producers reaped the benefits of high global thermal prices in 2018, but those prices sank in early 2019 and have remained at levels some miners will struggle to compete with once their contracted tons roll off the books, experts have said previously. Cheaper natural gas prices in Europe, partially due to U.S. LNG exports, have hurt coal prices in one of the nation's largest export destinations.

The U.S. Energy Information Administration projected in its August "Short-Term Energy Outlook" report that U.S. exports would total about 100 million tons this year and 90.4 million tons in 2020, both decreases from the 115.6 million tons in 2018. Doyle Trading Consultants has a slightly higher estimate for 2019, projecting U.S. producers will export 101 million tons, but forecasts that amount will drop to 82 million tons next year, said Andy Blumenfeld, head of the energy research firm's market analytics.

While there has not been an industrywide pullback in thermal coal production, Blumenfeld said he suspects that one is coming. Alliance Resource Partners LP recently announced plans to close its Dotiki mine in Kentucky, and some producers have reduced their guidance numbers, but there is less transparency in privately owned companies such as Murray Energy Corp.

Blumenfeld said he expects more production will come offline later this year. Some extra tonnage resulting from low seaborne pricing has helped replenish domestic stockpiles, he said, but output will need to decrease at some point.

"We've already seen the domestic prices come off," he said in an interview, "and I think that there's a good chance that it could come off a little bit further as we go through this transition period and the adjustment in terms of the supply."

Natural gas is hurting thermal coal prices in Asia as well, and Pacific netbacks have declined, he said during an Aug. 13 presentation at the American Coal Council's Coal Market Strategies 2019 conference in Utah. There also has not been much of a reduction in international steam coal supply, meaning 2020 is shaping up to be a tough year for U.S. producers to compete internationally.

"For most U.S. producers, if you're looking strictly at the spot numbers at this point, you're below water in terms of netbacks at the mine," Blumenfeld said. "There are some producers that are still capable of clearing a margin, but that list is getting pretty thin at this point. So, if you've got a longwall producer with good rail logistics and good port throughput, you're probably barely making it at this point."

Exports have proven to be critical to some U.S. coal regions, he said. Northern Appalachian producers exported 20% of their 2018 output, and Illinois Basin producers exported 18%, according to his presentation.

Matt Preston, Wood Mackenzie's research director for North America coal markets, said in an interview that he expects the international market to settle down later in 2020 and pick up sometime in 2022 or 2023. The interim low prices may be detrimental to steam producers who rely more heavily on the export market, Preston said, and miners will have to determine what sort of margins they are willing to accept on those tons.

Jennifer Sackson, assistant vice president of coal marketing for BNSF Railway Co., told attendees that the railroad has seen a drop in coal shipped to Canada to export. She estimated that BNSF has seen netbacks of about $10 or so below market for Powder River Basin coal shipped to Westshore Terminals Investment Corp.

"We have seen a decrease in our export movements this year," she said. "Last year was our highest that we have on record out of Westshore. In the future, it's really going to depend on what the pricing is internationally."