A ship is docked at Norfolk Southern's Lamberts Point coal terminal in Norfolk, Va. Coal exports have been an outlet for U.S. coal producers who face a declining customer base at home.
Improving domestic fundamentals and export opportunities may finally provide the sort of domestic supply-and-demand balance coal producers have sought for years, according to several coal executives on second-quarter earnings calls.
A tighter domestic market for coal would allow coal companies to demand better prices or longer contracts in deals with U.S. power plants and other coal customers. A shrinking fleet of coal-fired power plants has long challenged the sector, but relatively little new domestic coal supply has come online as favorable export market conditions provide a supply outlet for U.S. coal producers.
S&P Global Market Intelligence listened to a wide range of coal earnings calls for the second quarter and compiled some of the comments made on those calls. The standout quotes are in italics below.
Coal supply-demand dynamics improve
Alliance Resource Partners LP President and CEO Joseph Craft said he believes the Illinois Basin coal market has reached a balance between supply and demand as prices improved "probably 10% at least" since last quarter.
"There's expectations that some utilities will be out, looking for tons into 2018," Craft said on July 30. "I don't know that there's much supply out there for 2018, so we would expect that those utilities will be drawing from inventory. And then, therefore, they will need to buy a little bit more in '19 than what they did in '18 to replenish their stocks. ... We're really not seeing a supply response anywhere around the globe, so we have no reason to believe that we can't maintain our market share, if you will, for Illinois Basin product."
Recent supply-side improvement in the thermal coal market stems from widening export opportunities in the past several quarters as countries abroad increasingly seek coal from the U.S. Many coal companies, particularly in the eastern U.S., have reported success in selling thermal coal to power plants abroad.
"The export demand for our product remains strong and has acted to pull a considerable amount of volume out of the domestic thermal market," said Robert Moore, president and CEO of Illinois Basin coal producer Foresight Energy LP. "As a result, we have observed the domestic supply and demand levels moving to balance."
Coal markets expected to keep balance
Moore said the export market is expected to continue to provide an outlet for thermal coal production going into 2019 as global coal market fundamentals remain strong. Meanwhile, the international market for metallurgical coal, which had been volatile in recent quarters, is also near a balance and may settle down, Arch Coal Inc. CEO John Eaves said on a July 31 call.
"Of course, we're seeing new supply enter the market in response to the recent high prices, but the volume increases have been modest to date," Eaves said. "For the most part, we're seeing high-cost, previously idled capacity being pulled back into the market. New investment continues to be scarce, which should bode well for continued market balance in the near and intermediate term."
A multiyear lack of investment in new coal mines or equipment and resource depletion at existing mines will likely continue to put downward pressure on coal supply and quality, said Consol Energy Inc. Executive Vice President and CFO David Khani. An industry that was hit with a wave of bankruptcies only a few years ago now has relatively little debt and companies that can continue to produce coal with little to no capital investment such as Consol could be positioned to benefit.
"With the industry's balance sheet in strong shape, with fundamentals lined up to be solid for multiple years, and with free cash flow generation in all parts of the cycle, the space appears to be ready for a re-rating," Khani said. "I think we're going to wake up and realize that gas prices need to be higher, coal prices probably need to be sustainable and power prices need to be sustainable. Otherwise, the investment process is going to slow down dramatically, and that'll cause an improvement."
Powder River Basin market still challenged
While eastern U.S. coal producers are reporting a greater balance in domestic markets, some Powder River Basin producers say they continue to be challenged as their primary customers retire coal plants and favor natural gas for generating power. While companies like Cloud Peak Energy Inc. have offset some of their woes by striking deals with new customers abroad, low prices are forcing producers to think about whether the cost justifies mining some of their coal assets.
Cloud Peak CEO Colin Marshall said he was optimistic markets would come into balance and provide more favorable pricing in the oversupplied Powder River Basin.
"I don't know when supply and demand will come into balance in the [Powder River Basin]," Marshall said. "But it's got to be closer now than it was a year ago. ... I think everyone will be surprised when it happens and certainly, the utilities will be surprised. But when they can't actually get coal, or at least have to pay more to incentivize people to put extra capital or more people to work or restart equipment — we haven't seen that yet — when it occurs, then there will be reasons for the price to go up."
The Powder River Basin also took a hit in the quarter due to heavy rainfall that reduced production. Cloud Peak and Peabody Energy Corp. reported challenges from heavy precipitation at their large surface mines, though Arch Coal reported its Powder River Basin platform was able to pick up some extra business since its Thunder Basin mine was not as affected.