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OTC market: Rail-delivered CAPP coal prices post strongest gains of year

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OTC market: Rail-delivered CAPP coal prices post strongest gains of year

Rail-delivered Central Appalachian coal prices posted thestrongest gains of the year during the week ended Sept. 22 as internationalcoal prices remained near 52-week highs and domestic coal stockpiles fellfaster than expected.

The gains were concentrated along the nearby part of theforward curve. 12,500 Btu/lb, less-than-1% sulfur prices for delivery nextmonth climbed 13.8%, while prices for delivery quarter climbed 17.5%. Fordelivery in 2017, prices jumped 9% on the week. Along the entire forward curve,the rail-delivered product reached new 52-week highs.

Meanwhile, prices for the NYMEX-spec stayed relatively flat,as 8,800 Btu/lb Powder River Basin prices for delivery next quarter climbed7.8% to $11.49/ton.

Citing Energy Venture Analysis data, FBR & Co. analystLucas Pipes wrote in a Sept. 20 report that the August coal stockpile drawdownof more than 9 million tons exceeded his expectations by around 3 million tons.

"Inventories in each major basin declined by approximatelythree to 11 days of burn," Pipes wrote, adding that while he expectsthermal coal fundamentals to continue improving into 2017, he does not expectcoal inventories to reach normal levels before the spring of 2017.

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During the year, producers have become more aggressive incutting coal production in the face of market headwinds, including low naturalgas prices and elevated coal stockpiles. Weakness in international coal marketshas added to domestic producers' woes as U.S. coal that would otherwise beshipped overseas is absorbed into the nation's supply. As the U.S. dollar hasstrengthened relative to the currency of other coal-producing nations, it hascushioned the impact of falling international coal prices on producers thatoperate outside the U.S.

Lately, however, the natural gas market has shown strengthas natural gas storage inventories have been climbing at a lower-than-averagerate. Through Sept. 22, prompt-month natural gas futures are up 28.1% year-to-dateand up 15.4% year over year to $2.990/MMBtu.

Still, the market must chip away at elevated coal stockpilesin order for coal prices to recover substantially. Through the end of June,power-sector coal stockpiles were 12.0% above the 10-year average at 185.4million tons, according to the U.S. Energy Information Administration, whichestimated days of burn at 28.4% above and 33.9% above the five-year average forbituminous and subbituminous coal, respectively.

Meanwhile, international coal prices have to nearly 52-week highsfollowing steps taken by China to slashproduction. Prompt-month API2 swap futures are up 29.7% year-to-date and up14.9% year over year at $61.95/tonne.

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The EIA has cited weak global fundamentals and lowinternational coal prices as limiting U.S. coal exports, as "lower miningcosts, cheaper transportation costs and favorable exchange rates continue toprovide an advantage to mines in other major coal-exporting countries." Inits latest outlook,the government agency raised its expectations for 2016 U.S. coal exports 5.9%to 58.7 million tons. That figure is down 20.6% versus 2015, and the governmentexpects 2017 exports to slide another 9.9% to 52.9 million tons.

As of Sept. 22, the Australian dollar is 4.9% stronger year-to-dateand 8.5% stronger year over year relative to the U.S. dollar, while theColombian peso is 7.5% stronger relative to the U.S. dollar year over year,according to SNL Energy data. Although currencies of coal-producing countrieshave strengthened relative to the U.S. dollar, they remain weak relative tohistorical levels.

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Amid a weak U.S. coal export outlook, the EIA expects thatcoal-fired generation will fall behind gas-fired generation as the nation's topprovider of electricity for the first time annually in 2016. On revising lowerits natural gas price forecast, the U.S. government trimmed its short-termoutlook for power-sector coal demand to 673 million tons in 2016, down 0.4%versus the prior outlook.

Longer-term projections have U.S. coal consumption andproduction sliding furtherwhether or not carbon emissions limits are enacted.

Amid falling domestic demand, higher-cost production hasfallen off. The government expects the largest coal production decline, on botha percentage and tonnage basis, since record keeping began in 1949, with thelargest percentage declines coming out of the western U.S. and Appalachia.

EIA coal production estimates show that all coal-producingregions are being hit by the weak market. During the week ended Sept. 17,domestic coal production totaled 16.1 million tons, down 11.3% versus theyear-ago week, with the Appalachian region seeing a 15.2% decline. Year-to-datethrough Sept. 17, total domestic coal production is down 23.9% to 500.9 milliontons.

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SNL Energy is an offering of S&P Global MarketIntelligence. Market prices and included industry data are current as of thetime of publication and are subject to change. For more detailed market data,including power,naturalgas and coalindex prices, as well as forwardsand futures,visit our Commodities Pages. For weekly U.S. coal production data, visit our regional coalproduction data page. For foreign currency exchange rates, visit our currency exchangerates data page.