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Bearish fundamentals dim long-term prospects for coal, industry players say

The export market for U.S. thermal coal continues to gain strength but is likely only a temporary boost given the bearish long-term fundamentals for domestic consumption, several speakers at an industry event said Dec. 5.

Emily Medine, a principal with Energy Ventures Analysis, said at the American Coal Council's annual Coal Trading Conference in New York that the thermal coal sector remains "challenged."

Medine cited a surplus of natural gas, lack of growth in power demand, wind production tax credits, a strong U.S. dollar, continued regulatory pressure and public perception against coal.

She also listed a number of proposals that could lessen coal's burden, including vertical integration, which would allow coal producers to own coal-fired power plants; increased LNG exports; alternative pricing mechanisms, e.g., tying coal prices to power prices; and a possible fuel security rule, such as the one under consideration by the Federal Energy Regulatory Commission. She also pointed out the correlation with natural gas prices: when they rise, coal generation increases.

"There's nothing more important than keeping these coal plants online when gas prices rise," Medine said.

Load growth declining

Paul Bailey, president and CEO of the American Coalition for Clean Coal Electricity, highlighted declining load growth as among the many challenges facing the thermal coal sector.

"In the old days, the pie got larger and everyone's piece got larger, but the pie is not getting larger, so load growth is really having a profound effect on the coal fleet," Bailey said.

The notice of proposed rulemaking on fuel security FERC is considering is a significant opportunity for coal that has "magnified the debate about what's a reliable and resilient grid," Bailey said.

While the proposal ostensibly would affect only about 42 GW of coal generation, he said, that is roughly 16% of the 262 GW of coal generation in operation and would help the market and regulators decide whether the generators with on-site fuel storage are adequately valued.

In the interim, exports remain a welcome opportunity, and a number of conference attendees believe that the current rally has legs.

Jack Porco, with Xcoal Energy & Resources, said he believes that exports will continue apace into 2018, though supplier discipline will remain an issue, as will policy decisions in China and India.

Andrew Moore is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.