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US coal exports may face challenges in longer term as demand shifts to Asia

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US coal exports may face challenges in longer term as demand shifts to Asia

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U.S. coal companies exported about 23.7 million tonnes of coal and petroleum coke to Asian nations in the first half of 2019, according to data compiled by S&P Global Market Intelligence.
Source: Thinkstock

India was the top destination for U.S. coal among Asian nations in the first half of 2019 as well as one of the top global destinations in recent periods, but analysts said thermal coal producers may struggle to compete in the Asian market in the near future.

Russia and Australia have reportedly been eyeing India's coal business recently, and their proximity to the subcontinent may limit U.S. coal miners' opportunities, especially given the lack of coal terminal capacity along the West Coast.

U.S. coal companies shipped nearly 16.3 million tonnes of coal and about 23.7 million tonnes of coal and petroleum coke to Asian nations in the first six months of the year, according to data compiled by S&P Global Market Intelligence. Of that, about 3.6 million tonnes of coal and 6.5 million tonnes of coal and petroleum coke were exported through West Coast facilities.

Gregory Marmon, a Wood Mackenzie senior research analyst, expects U.S. producers to target Middle Eastern and African countries, such as Morocco and Egypt, given the competition in Asia. India will remain a viable market, Marmon said, "but it's a very risky market, so there will be a lot of volatility around it."

"In terms of thermal coal, we see them continuing to target India just because of the quality advantages and price advantages of some U.S. coals to compete in that market," Marmon said. "U.S. coals are going to grow their market share of U.S. exports into that region, but they're going to target more Middle Eastern countries that are a little bit closer and they can handle a little bit better in terms of competing with."

Benjamin Nelson, senior credit officer and lead coal analyst at Moody's, does not expect U.S. producers to be squeezed out of Asia in the near term but said, "it becomes increasingly difficult as the U.S. coal industry becomes more dependent one way or another on Asia." Given the distance, it will depend on pricing, with lower prices challenging domestic miners' margins more than producers that do not have to send their coal as far.

As the U.S. coal industry shrinks over time and becomes increasingly export driven, coal miners' profitability will depend more on the competitiveness of their operations. Some coal producers are also more dependent on exports than others, Nelson said, noting that companies such as Consol Energy Inc. and Alliance Resource Partners LP are better positioned with stronger credit profiles, and Peabody Energy Corp., the nation's largest coal company, has Australian coal assets and only exports some Alabaman metallurgical coal from the U.S. Miners such as Foresight Energy LP and Murray Energy Corp. may struggle more.

"As we think about prospects for companies over the next several years, we're going to pay more and more attention to specific commercial strategies around exporting: who's developing which markets, which relationships, how and so forth," Nelson said. "I'd also say that producers at the lower end of our ratings spectrum that have meaningful exposure to the export market, like Foresight or Murray, that's where you'll see the most meaningful stress."

B. Riley FBR analyst Lucas Pipes told Market Intelligence on Sept. 17 that Asia is "certainly the growth market" for coal. Even with potential changes in China, other Asian nations, especially in southern and Southeast Asia, will have the highest demand for the fuel over the coming decade, Pipes said. Despite the U.S. producers' geographic disadvantage in serving these markets, there could still be a place for U.S. coal depending on the demand growth in each nation and better-positioned competitors' capacity expansions.

Generally speaking, most U.S. exports off the East Coast have a higher Btu and sulfur content than coal in Russia or Australia, while Powder River Basin coal's lower sulfur and much lower Btu content is more comparable to Indonesian coal, Pipes said.

The U.S. has traditionally been a swing supplier in the global thermal market, but metallurgical coal exports may have a more stable future, Pipes said.

"It's hard to envision a world where the U.S. doesn't continue to play a major role in the global met coal markets," Pipes said. "And 'major' is not even strong enough; it's a dominant role."

The analyst expects coking coal exports to be flat to possibly up slightly over the next five years while thermal exports will be "marginally down."

A decline in exported steam coal could affect pricing at home if tonnage destined for export is instead sold into the domestic market.

"The U.S. thermal coal exports are very important for the U.S. coal producers. They now account for roughly 10% of demand," Pipes said. "It's not only an important outlet for volume, but it's also an important factor in price negotiations in the domestic market."

Wood Mackenzie projected a near-term decline in thermal coal exports, with shipments hitting an especially low point in 2023. However, the research and consultancy group expects to see a "pretty substantial growth in U.S. exports by the 2030s just because U.S. coals at that point will be competitive as depletion occurs and new mines are needed in the seaborne thermal market," Marmon said.

The main question will be how many thermal coal producers can hang on long enough until seaborne demand rises.

"There will be advantages of U.S. coals into those Middle Eastern and African countries, and they will be able to grow their market share in the long-term," Marmon said. "If they're around at that point, we do see that."