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Preliminary data: Coal surge in Q3'16 slowed down in Q4'16

Preliminary data from the U.S. Mine Safety and Health Administration suggests that the steep upward bounce in coal production in the third quarter of 2016 largely leveled off in the last quarter of the year.

Though full U.S. coal production data is not yet available, most coal mines active in the third quarter of 2016 have already reported fourth-quarter data that shows production totals were nearly level with third-quarter totals. An S&P Global Market Intelligence analysis shows coal mines reporting production over zero tons in the fourth quarter so far, which is roughly 95% of the number of mines that reported more than zero in the prior quarter, represent about 0.2% more coal produced than in the prior quarter.

Mines that reported production in the third quarter but have yet to report data in the final quarter accounted for about 2.9 million tons, or 1.5% of third-quarter production. Total 2016 production, not including mines that have not yet posted data, was about 711.2 million tons.

Given the small number of mines remaining to report and their prior-quarter production, the industry may have fallen below the 738.7 million tons the U.S. Energy Information Administration predicted would be mined in 2016 in its recent short-term energy projection. Even at the EIA's higher estimate, coal production would be at the lowest level since 1978.

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Whether the recent boost and leveling of coal production persists likely depends on the strength and duration of a recent rally in coal prices. That matter is up for debate among those involved with the industry. An exhibit that Peabody Energy Corp. filed alongside its bankruptcy reorganization documents insisted projections that metallurgical or thermal coal prices would stabilize near recent highs were "unreasonable" and coal prices will likely fall back to historical norms.

Former Peabody executive Fred Palmer, on the other hand, filed an objection with the bankruptcy court, insisting that "coal prices will stay elevated not just this year, but in the years beyond."

Railroads are anticipating that their coal customers will get a tailwind boost in early 2017.

Union Pacific Corp. Chief Marketing Officer and Executive Vice President Elizabeth Whited said on a Jan. 19 earnings call that coal volumes are expected to increase in the first part of 2017. CSX Corp. CFO and Executive Vice President Frank Lonegro believes that recent production cuts in China will continue to drive demand for U.S. metallurgical coal and expects exports to increase early in 2017.

The Powder River Basin, by far the nation's largest coal-producing region, has been largely driving the nationwide coal production trends. Production sharply increased in the third quarter but slightly decreased in the fourth quarter.

Coal production in Central Appalachia, where seams are becoming thinner and more expensive to mine, has been sharply declining, though the decline has largely leveled off and production even improved very slightly through 2016. Meanwhile, Northern Appalachia saw some decline but has been relatively stable since around 2009, with the past few quarters serving to bring production back up after a fall in mid-2015.

The Illinois Basin saw production remain relatively stable until faltering in early 2015. That decline appears to have stabilized in the back half of 2016.

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Five of the top six coal mines, by production, reporting so far boosted coal volumes in the fourth quarter. The largest coal mine in the U.S., Peabody's North Antelope Rochelle mine, produced about 1.8% more coal in the recent quarter compared to the prior quarter, though that was still down 7.0% from the year-ago quarter.

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