Coal mined from the Powder River Basin, the most productive coal-producing area in the U.S., is expected to decline significantly in 2020 and could pressure companies to close "at least a few [Powder River Basin] mines" in the early 2020s, Moody's Investors Service wrote in an Oct. 16 note.
Multiple bankruptcy restructurings and a planned joint venture between Arch Coal Inc. and Peabody Energy Corp. in the Powder River Basin have recently changed the competitive landscape in the region. However, that has not fundamentally altered its poor overall long-term trajectory, wrote Benjamin Nelson, a vice president and senior credit officer with Moody's.
"Demand for [Powder River Basin] coal had surged in the 1990s as an environmentally friendly alternative to higher-sulfur coal from the U.S. east, but coal-fired power plants' adoption of scrubbers and the retirement of many older units built before the passage of the Clean Air Act has diminished the appeal. [Powder River Basin] producers' credit quality depends heavily on delivered costs, which means some significant factors influencing the competitiveness of [Powder River Basin] coal are largely beyond the producers' control."
The region produced 312.4 million tons of coal in the 12 months that ended with the second quarter of 2019. A relatively small number of operators produce coal in the Powder River Basin from just 16 mines.
Nelson also pointed out that the entire coal industry faces significant risk due to investors increasingly focused on risks related to environmental, social and governance factors. The Powder River Basin is particularly susceptible because the coal mined there is used for power generation.
With many generators phasing out coal generation in the U.S. and relatively few export outlets for the area, producers may have little choice but to throttle back production. Nelson noted that all of the companies rated by Moody's are focusing on metallurgical coal production from other regions.