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Amid historically low coal demand, some signs of stability emerge


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Amid historically low coal demand, some signs of stability emerge

Steam coal markets traded mixed during April, drawing some supportfrom stabilizing natural gas prices. Higher-btu coal prices continued their slide,indicating ongoing weakness in metallurgical demand. While natural gas pricing isup against its early March low, higher prices are still needed if coal demand isto pick up ahead of the summer peak season. Weekly coal shipments during the monthaveraged 10.7 million tons, a precipitous 38% drop from the same time last year.The NYMEX CAPP prompt-month benchmark traded up 68 cents/ton, or 1.6%, while NYMEXPRB lost 25 cents/ton, or 2.6%, on the month. The Illinois Basin OTC mark surged$3.25/ton, or 12.4%. Physical markers were flat to lower for the month, with CAPPphysicals declining $2/ton and NAPP high-btu physical markers shedding $3.00/ton.

With an unusually low amount of natural gas withdrawn from storageover the winter, storage users will tend to inject gas at lower rates during thespring. This activity will stabilize and whittle down the high surplus level fromwinter's end. During April, the surplus of natural gas in storage remained in excessof 800 Bcf. With supply cutbacks from natural gas producers reducing spot gas availability,the rally in natural gas to close out March held its ground during April. HenryHub spot prices ranged from $1.88/MMBtu to $2.03/MMBtu during the month.

While stable natural gas pricing provides headroom for spot coalprices, $2/MMBtu natural gas will not trigger appreciable growth in coal burn, especiallyduring the mild shoulder months of April and May. Coal producers are therefore maintaininghistorically low levels of production to identify sustainable demand levels duringthe first half of 2016. S&P Global Market Intelligence estimates that 45 milliontons of surplus coal inventories exist in the market today, which at least did notgrow substantially over the last two months.

The chart below shows the current price forecast of S&P GlobalMarket Intelligence for the PRB 8800 and 8400 markers.

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The near-term forward strip for PRB remains relatively depressed,as production cutbacks to accommodate low demand continue through 2018. Accordingly,PRB 8800 forwards sell below $11/ton through 2018. A combination of additional 2016coal retirements, low natural gas prices, and the surplus of coal from this pastwinter will suppress production severely this year and next, with modest room forproduction growth through 2019. Correspondingly, the inventory overhang and surplusproduction capacity limits price growth during this period. NYMEX indications forPRB 8800 are available through 2018, with the long-term forecast picking up in 2019.

NYMEX CAPP and NAPP physical pricing has held relatively firmthrough the first quarter of 2016, even as natural gas prices fell below the $2/MMBtumark. ILB markers discounted to a greater degree during the winter to compete withemergent natural gas competition in the Midwest. Export markets for high-btu steamcoal and metallurgical coal opened weak for the first two months of 2016, and exportdemand is expected to continue trending lower. S&P Global Market Intelligenceestimates 2016 exports at 58 million tons, down 17 million tons from last year.

While S&P Global Market Intelligence expects bituminous coaldiscounts to ease slightly into 2017, further price growth will be limited by intra-basincompetition for flat-to-declining steam generation volumes through 2019.

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The above chart indicates price discounting in bituminous marketsthrough the first half of 2016, with upward movement to 2017 as supply and pricesbegin to realign. S&P Global Market Intelligence expects that price growth acrossmost basins will be limited after 2017 as generation demand declines by more than100 million tons from 2015 levels.

Coal production and demand

Shoulder season coal production took its expected leg down, averaging10.7 million tons per week during April. Year-to-date production levels are one-thirdlower than the same period in 2015, as producers look to make up some of the shortfallduring the second half of 2016. A combination of summer demand and higher naturalgas prices should support additional tonnage in the market. Even so, S&P GlobalMarket Intelligence forecasts CAPP and NAPP will lose 41 million tons of annualproduction in 2016 from 2015 levels, while the Southern PRB's market will shrinkby 79 million tons. Electric-sector demand as a whole is projected to fall to 626million tons in 2016, or 147 million tons lower than 2015.

The chart below compares the production forecast with recenthistory. As noted above, electric-sector coal demand will fall by 147 million tonsfrom 2015 to the end of 2016, before making a modest recovery. The low price regimeimposed by natural gas is projected to cause most of its coal market loss throughthe end of this year, with demand stabilizing somewhat through 2019. Overall, thecoal market is projected to shrink by an additional 93 million tons from 2015-2020,including both domestic demand and exports.

Production outlook PowderRiver Basin

The 2016 forecast of S&P Global Market Intelligence projectsmore than 90 million tons will be lost compared to 2015, as surplus coal inventoriesstifle near-term demand and natural gas prices limit uplift. Powder River Basin2016 production (Northern and Southern) is projected at 313 million tons. It appearedlast year that PRB demand could be sustained at the expenseof regional coal production in Texas and the Western U.S., but demand levels forregional coal have held steady, forcing greater cutbacks at PRB mines. Absent apush from seasonal demand, surplus inventory in the coal market is expected to persistthrough 2018.

Production outlook IllinoisBasin

S&P Global Market Intelligence forecasts 2016 ILB productionfinished at 108 million tons, a 16 million-ton decline from 2015. This is drivenby ongoing weakness for export markets and greater gas competition in ILB's coreMidwest markets. As with the PRB, ILB producers have some ability to maintain lowprices and preserve coal burn, which will keep production flat at these levels through2017. Similar to the forecast for PRB, ILB producers would need a push from seasonaldemand to clear the markets sooner and begin to grow production.

Production outlook Appalachianbasins

Appalachian basins have been especially hard hit by the triplethreat of higher mining costs, the lowest-cost natural gas in the country and weakglobal metallurgical markets. This has driven rapidly declining production, particularlyin Central Appalachia. Prospects for higher coal plant demand appear delayed untilsummer 2016 at the earliest, but the first beneficiaries of such a recovery wouldbe the Midwest and West. S&P Global Market Intelligence currently expects 2016production will total 177 million tons, or 20.3% less than 2015 levels. Ongoingmarket loss is expected to drive 2019 production down to 171 million tons, withongoing declines in Central Appalachia offset by modest growth in Northern Appalachia.While metallurgical coal production has generally been firmer than production fordomestic steam markets, Central Appalachia is expected to reach a point where consolidationof production reduces met coal production capacity along with the reduction in steamcoal production capacity. This may push met coal production for export down furtherstill.

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Coal forecast methodologyoverview

Market-indicative coal forecasts produced by S&PGlobal Market Intelligence represent forward curves for spot-traded instruments,analogous to a strip of contracts, with the shorter tenors (current year, promptyear, plus additional years if available) driven by the observed/assessed marketand the longer tenors (years 3-20 for physically assessed markers, and years 5-20for markers with NYMEX futures) driven by fundamental estimates of cash costs ofproduction, accepted returns to capital, regional productive capacity, and forecastsupply and demand. For the long-tenored portion of the curve, S&P Global MarketIntelligence forecasts prices for specific coal markers, and defines the remainingmarkers via historical spreads.

SNLEnergy is an offering of S&P Global Market Intelligence.