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Moody's reports negative 2020 outlook for US coal, steel industries

Citing slowing economic growth and increasingly difficult market conditions, Moody's Investors Service placed a negative outlook on the U.S. coal and steel sectors for 2020.

The cumulative EBITDA of U.S. coal producers is forecast to decline by more than 3% in 2020 compared to 2019, according to a Dec. 12 report detailing the firm's outlook on base metals, steel and coal. It maintained its negative outlook for the U.S. coal sector amid weakened 2019 demand fundamentals that it expects will yield a lesser performance from the industry in 2020.

Earlier this year, Moody's updated its outlook on the coal sector from stable to negative due to a weakening export market. At that time, the firm noted that higher-cost U.S. coal producers will serve as swing producers globally, "leading to significant margin volatility." Low-cost producers that restructured and have "diverse footprints" are better positioned heading into the new year.

"Our negative outlook for the North American coal industry reflects our expectation for weaker EBITDA in H2 2019 and meaningfully weaker EBITDA in 2020," the report states. "This is driven by a substantive decrease in export prices, combined with weaker steel industry conditions and an ongoing decline in domestic demand from coal-fired power plants for thermal coal."

On the thermal coal side, Moody's outlook is "increasingly stressed" given the factors affecting utility coal demand. The firm expects there will be a significant decline in coal demand over the coming decade as utilities move away from coal in favor of natural gas and renewable energy sources. It also estimates that Henry Hub natural gas prices will remain low at between $2.25 and $3.25 per MMBtu through 2020.

The U.S. Energy Information Administration expects coal to account for about 25% of the nation's electricity generation in 2019 and about 22% in 2020. Moody's expects thermal coal's share of the U.S. power mix could fall to 11% by 2030.

The firm views the U.S. metallurgical coal sector more favorably, though it noted that producers "vary significantly by quality and cash costs." Escalating trade tensions increase uncertainty, and the recent decline in prices suggest weaker steel demand, the report states.

Overall, the ability to access capital continues to be a concern for coal miners as investors prioritize environmental, social and governance factors in their decision-making.

Moody's negative 2020 outlook for the U.S. steel industry stems from forecast muted demand due to slowing economic growth and "lackluster prices." It expects lessening economic growth to yield "muted demand" in 2020 and expensive iron ore and metallurgical coal to hurt blast furnace producers.

"Trade frictions will continue to hurt performance, although imports will remain low," Moody's said.