At least one analyst said there are some glimpses of hopefor the coal industry buried beneath the April 13 announcement was for .
FBR & Co. analyst Lucas Pipes wrote in an April 14 notethat with a sharp decline in coal production and the potential for utilitystockpiles to be drawn down, there is a good chance coal production couldincrease again in 2017. Pipes advised investors that , which has trimmedits coal profile to select assets as it shifts toward more natural gas use, maybe best positioned to take advantage if the market rebounds.
Pipes noted that since the beginning of the year, coalproduction was down32% year-over-year through April 2. That decline rate, he wrote, is expected tomoderate through the year but could still end at coal production levels 20% to25% lower than 2015.
"We believe this would lead to a stockpile reduction ofapproximately 57 million tons to 131 million tons," Pipes said. "Shouldour views of a recovery in natural gas prices materialize, 2017 coal productionwould clearly have to increase."
Pipes projected a "major pull on inventories" atcoal-fired utilities during the summer months.
"Into 2017, we believe that inventories could fall touncomfortably low levels for utilities," Pipes said.
The note also said despite projecting moderate natural gassupply growth in 2017, coal generation may still see some gain in 2017.
"Based on the drilling and completion capitalexpenditure reductions of over 50%, on our estimates, we believe that ournatural gas supply growth assumption for 2017 could prove to be aggressive,"Pipes wrote. "Even so, we are estimating gas-to-coal switching of almost 4Bcfd in 2017. As we have stated before, we see the potential for a cyclicalrecovery in domestic natural gas prices and prefer CONSOL Energy for longexposure to this trend."
Pipes also pointed to potential improvement in metallurgicalcoal markets. Following the recent second-quarter benchmark of $84/tonne, spot met coalprices in the Pacific Basin have already moved above that to $90/tonne.
Pipes said two drivers for the improvement in met coalmarket trends are improved demand in places such as China and a weaker U.S.dollar and other currency issues. FBR maintains a favorable outlook on coal assupply cuts in the U.S. continue.