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OTC market: Rail-delivered CAPP coal prices fall amid bleak fundamentals

Coalprices were mixed during the week ended April 7 as soft demand stemming from weaknatural gas prices and a mild winter continued to pervade market sentiment.

As thenearby month and quarter rolled forward, prices for barge-delivered Central Appalachiancoal saw the largest declines. Prompt-month prices ended the week at $35/ton, whilethe price for delivery in the third quarter ended the week at $35.95/ton. For deliveryin 2017, the price for the 12,500 Btu/lb, less-than-1% sulfur product fell 3.8%to $42.94/ton.

A combinationof factors is weighing on the domestic thermal markets, including low natural gasprices and elevated coal stockpiles. Weakness in international coal markets hasadded to domestic producers' woes as U.S. coal that would otherwise be shipped overseasis absorbed into the nation's supply. As the U.S. dollar has strengthened relativeto the currency of other coal-producing nations, it has cushioned the impact offalling international coal prices on producers that operate outside the U.S.

ThroughApril 7, prompt-month natural gas futures are down 13.5% year-to-date and 20.2%year over year to $2.018/MMBtu. As natural gas prices have weakened, coal stockpileshave grown.

Throughthe end of January, power-sector coal stockpiles were 23.2% above the 10-year averageto 189.1 million tons, according to the U.S. Energy Information Administration,which estimated days of burn at 18.1% and 47.2% above the five-year average forbituminous and subbituminous coal, respectively.

Meanwhile,the international coal market is not in much better shape as prompt-month API2 swapfutures are down 7.7% year to date and 24.6% year over year to $44.05/tonne.

In itslatest short-term outlook,the EIA cited weak global fundamentals and low international coal prices as limitingU.S. coal exports through 2017, as "lower mining costs, cheaper transportationcosts and favorable exchange rates … continue to provide an advantage to mines inother major coal-exporting countries."

As ofApril 7, the Australian dollar has improved 3.3% on a year-to-date basis but remains2.4% weaker year over year relative to the U.S. dollar, while the Colombian pesois 24.6% weaker relative to the U.S. dollar year over year, according to SNL Energydata.

Amida weak U.S. coal export outlook, the EIA expects that coal-fired generation willfall behind gas-fired generation as the nation's top provider of electricity forthe first time annually in 2016. The U.S. government trimmed its short-term outlookfor coal demand to 711 million tons in 2016, down 4.8% versus the prior outlook,and expects it to recover to 721 million tons in 2017, down 3.9% versus the prioroutlook. The latest projections reflect changes to the government's assumptionsabout how coal generation retirements would affect generation patterns in the comingyears. The government also blamed this year's mild winter and low natural gas pricesfor sliding demand.

Longer-termprojections have U.S. coal consumption and production sliding because of market and regulatoryfactors.

Coalproducers are struggling to balance running their operations efficiently againstmaintaining market share, and higher-cost production has fallen off. After seeingthe largest coal production decline on record in 2015, the government expects thesupply mix to shift among coal-producing regions.

In 2006,the Interior region, which includes the Illinois Basin, accounted for 13% of production,and the EIA expects that to grow to 21% of production in 2016 and 2017, as productiondeclines at a slower rate than that of the Appalachian and Western regions.

EIA coalproduction estimates show all coal-producing regions are being hit by the weak market.During the week ended April 2, domestic coal production totaled 11 million tons,down 37.9% versus the year-ago week, with the Appalachian region seeing a 41.8%decline. Year-to-date through April 2, total domestic coal production is down 32.1%to 168.3 million tons, with the Western region accounting for approximately 52%of that decline.

SNLEnergy is a part of S&P Global Market Intelligence. Market prices and includedindustry data are current as of the time of publication and are subject to change.For more detailed market data, including power,naturalgas and coalindex prices, as well as forwardsand futures,visit our Commodities Pages. For weekly U.S. coal production data, visit our regional coal productiondata page. For foreign currency exchange rates, visit our currency exchange ratesdata page.