Export growth for seaborne coal continued in August, keeping upward pressure on high-quality bituminous coal prices. Domestic steam coal demand picked up as well, driving some of the highest overall production levels of the year. Higher domestic demand did not translate to price growth however, as natural gas remained competitively priced through the month. Markers for coal sold domestically turned lower during August even as natural gas prices moved higher.
Physical CAPP 12,500 Btu/lb benchmarks increased 50 cents/ton, or 0.7%, while NYMEX CAPP fell $1.75/ton, or 3.0%. NAPP Pittsburgh Seam 13,000 Btu/lb gained $1.70/ton, or 3.1%, building on large gains in July. Illinois Basin markers eased 10 cents/ton, and the NYMEX PRB benchmark slid 80 cents/ton, 6.2%.
Natural gas prices rallied in August after significant price weakness in July, as summer electricity demand and low storage levels held the market's attention. Henry Hub spot prices opened the month at $2.82/MMBtu and surged mid-month to a high of $3.04/MMBtu, before easing to close the month at $2.96/MMBtu. The natural gas storage deficit continued to grow during August, as summer demand caused injections to trend further below historical averages. The storage deficit as of Aug. 24 stood at 588 Bcf, up from 558 Bcf the same week of July. This raises the prospect that storage levels will be significantly lower than usual going into fall, but upward pricing pressure from this has been modest so far.
During 2018, most of the country's natural gas spot markets have priced at a discount to Henry Hub. These discounts held during August with Chicago 10 cents below Henry Hub, Marcellus points 18 cents below, and TETCO M3 23 cents below. SoCal Border gas remained at a premium of 14 cents on California power demand and constrained natural gas delivery, while much of the West remains discounted. S&P Global Market intelligence expects that the expansion of discounted natural gas to regions beyond the Marcellus Shale will continue to pressure domestic coal demand and restrain coal price growth.
Coal inventories shrank in June on higher demand, with the U.S. Energy Information Administration estimating stockpiles at 121 million tons. S&P Global Market Intelligence estimates normal year end stockpiles at 152 million tons, suggesting ongoing demand pressure to rebuild inventories, independent of natural gas competition.
The chart below shows the current price forecast for the PRB 8800 and 8400 markers.
Pricing for the Powder River Basin is expected to be driven by domestic demand dynamics, with coal retirements and competitive natural gas restraining demand and prices. Declines in natural gas pricing mentioned above have already pressured near-term pricing and volumes. Looking ahead, flat pricing is expected as higher demand from export markets is more than offset by these domestic factors. While long-haul PRB is resilient to gas generation priced from $2.85/MMBtu to $3.00/MMBtu, the current strip for natural gas and associated regional prices trends lower through 2019, potentially eroding coal demand. Combined with retirements of Midwestern PRB-burning plants, this creates surplus capacity in the PRB, tending to reinforce current price levels over the next few years.
The need to refill coal stockpiles may support bituminous markets through 2018, along with continuing firmer seaborne markets. Year-over-year export volumes have held strong, allowing prices for export-ready coal and metallurgical coal complements to surge through the summer.
The above chart forecasts flat pricing across all bituminous coal types, as pricing pressure from natural gas builds into 2019, with modest price growth thereafter as natural gas prices trend back up. As with the PRB, ongoing low natural gas prices creates a ceiling for coal prices, restricting price growth. S&P Global Market Intelligence projects that the combination of natural gas prices and coal retirements will pressure generation demand through 2021, with overall demand falling by 187 million tons from 2017-2021.
Coal production and demand
For the four weeks ending Aug. 25, coal shipments averaged 15.6 million tons, with support coming from summertime demand and exports. This represents the highest four-week total of 2018, representing a rebound from lackluster July results. With second-quarter U.S. Mine Safety and Health Administration production statistics complete, production levels in eastern bituminous regions (Central, Northern, and Southern Appalachia) are forecast to exceed 2017 levels on the strength of exports. Continued momentum in the Atlantic basin for metallurgical and bituminous coal offsets losses in domestic steam demand. By contrast, Southern PRB is projected down 5%, as demand erosion from natural gas and retirements more than offsets stronger exports. Illinois Basin is expected to grow production by 4%, also due to higher steam coal exports.
The chart below compares the current production forecast with recent history. Electric sector demand is projected to decline from 675 million tons in 2017 to 601 million tons in 2018, and to come under further pressure in 2019. A surge in announced coal retirements over the next four years combined with lower natural gas prices is projected to push coal generation demand to a low point of 487 million tons per year by 2022. Last year's boost in demand will be tested, with the overall coal market (domestic demand and exports) projected to decline by 160 million tons from 2017-2021.
Production outlook — Powder River Basin
Unusually heavy rainfall impacted production at several Southern PRB mines during May and June, leading to lower volumes than expected. These losses may not be fully recovered as August volumes come up against a weakening natural gas price curve. Exports and low domestic inventories should offset some of the lost volumes, but it does not appear the entirety of the loss can be made up by the end of 2018. Based on mid-year results, S&P Global Market Intelligence now projects lower production in the PRB compared to 2017, with total PRB production (Northern and Southern) projected at 325 million tons. While no additional coal plants are scheduled to retire until the end of 2018, retirement of coal generation in the Midwest and Texas, along with lower natural gas prices, is projected to shrink the market through 2021. Modest growth opportunities include displacement of smaller western coal producers, along with further expansion in export markets. Overall, PRB is forecast to reduce production by 15 million tons in 2018, before losing an additional 50 million tons in 2019.
Production outlook — Illinois Basin
Increased availability of Marcellus/Utica shale natural gas into the Midwest has maintained downward pressure on spot coal prices, and has cut into domestic demand for ILB coal. This demand pressure has been offset by export volumes, keeping overall production levels stable. S&P Global Market Intelligence forecasts 2018 ILB production at 107 million tons, nearly 4% higher than 2017. Export markets are helping to drive this modest growth. As in other coal regions, natural gas prices are expected to move further downward by 2019, with shale gas deliverability into the Midwest driving Illinois Basin coal volumes down. With low natural gas prices persisting beyond 2018, Illinois Basin production is projected fall below 100 million tons per year, and remain relatively flat thereafter.
Production outlook — Appalachian basins
Appalachian basin coal production has increasingly shifted to metallurgical and export steam markets, with long-haul thermal domestic markets continuing to erode. Strong seaborne thermal coal pricing drove production momentum during the second quarter, bringing overall production in line with 2017. Going into the third quarter, there are no scheduled coal retirements and displacement by natural gas is already maximized. S&P Global Market Intelligence projects total production at 203 million tons, which would be 2% higher than 2017 levels. Exports of thermal and metallurgical coal ease in 2019 which, combined with retiring coal generation is expected to reduce production by 26 million tons.
Coal forecast methodology overview
Market-indicative coal forecasts produced by S&P Global Market Intelligence represent forward curves for spot-traded instruments, analogous to a strip of contracts, with the shorter tenors (current year, prompt year, plus additional years if available) driven by the observed/assessed market and the longer tenors (typically years 3-20 for physically assessed markers and NYMEX futures) driven by fundamental estimates of cash costs of production, accepted returns to capital, regional productive capacity, and forecast supply and demand. For the long-tenored portion of the curve, S&P Global Market Intelligence forecasts prices for specific coal markers, and defines the remaining markers via historical spreads.