Coal production continued steadily through July, with eastern markets continuing to supply increasing export demand and western markets ramping up for summer electric load. Summer demand has been lower than anticipated, with weekly shipments for July 7% higher than the same period in 2016. However, natural gas held firm during July, creating modest headroom for coal prices to grow. The NYMEX CAPP benchmark traded flat for July, while the NYMEX PRB surged $0.97/ton (8.5%), continuing price growth that began in June. High-Btu coal with good export specifications gained during the month, with CAPP high-Btu gaining $2.15/ton (4.0%) and NAPP mid-sulfur gaining $0.10/ton (0.2%).
Natural gas prices traded a little higher during July than in June, as higher demand worked to clear surplus storage. After opening the month at $2.98/MMBtu, Henry Hub spot prices varied midmonth from $2.89/MMBtu to $3.11/MMBtu, before closing at $2.96/MMBtu. With July injections to storage well below historical averages, the natural gas surplus is nearly cleared. This could set the stage for an August rally if significant cooling season demand kicks in. Storage levels as of July 21 stood at 2,990 Bcf, only 112 Bcf above five-year averages.
Coal inventories also fell, after building up during the spring shoulder season. The Energy Information Administration estimated June stockpiles at 161 million tons, 5.9% above normal. The decline in inventory, despite a relative lack of price movement, indicates that summer demand is having an impact.
The chart below shows the current price forecast for the PRB 8800 and 8400 markers.
Pricing for the Powder River Basin is expected to be the most resilient to ongoing competition from natural gas over the next few years. While competitive pressure against bituminous coal builds as natural gas falls below $3 per MMBtu, most coal customers using Powder River Basin remain competitive at this price level. However, with the current strip for natural gas trending lower through 2018, PRB 8800 is forecast to remain below $13/ton. For the near term, PRB has used much of its pricing "headroom" against the natural gas strip, after factoring in transport costs to plants. Looking past 2018, higher prices for PRB will be supported by upward movement in natural gas prices, offset by the expected demand drag of coal retirements in the West and Midwest.
While competition from natural gas remains severe for eastern coal-fired generation, higher natural gas prices at Henry Hub and tightening basis relationships in the Northeast shale regions have provided some relief. Shipments through the fourth week of July indicate continued support in both international and domestic markets. The pricing rally in high-rank coal is cooling off, with natural gas and coal close to an equilibrium in generation markets. This is expected to bring Central Appalachian pricing back in line with bituminous markers in Northern Appalachia and Illinois Basin, with sustainable pricing expected in 2018. Price growth beyond 2018 will be limited by more competitive natural gas, intrabasin competition and declining steam generation demand driven by additional coal retirements through 2021.
The above chart shows flat pricing in Central Appalachia as pricing pressure from natural gas continues, along with modest growth in Northern Appalachia and Illinois Basin coal prices as surplus inventories are reduced. S&P Global Market Intelligence projects that a combination of low and stable natural gas prices and a further wave of coal retirements will pressure generation demand in 2018 through 2019, with demand falling by 80 million tons from 2017 through 2021.
Coal production and demand
For the four weeks that ended July 22, coal shipments averaged 15.0 million tons, a somewhat disappointing result for the summer peak demand season, but steady nonetheless. Production levels came in about 7% higher than the same period in 2016, when a surge in natural gas prices into the summer brought coal demand out of a steep decline. With modestly improved spreads to natural gas and stronger exports, second-quarter production reports posted to the Mine Safety and Health Administration show substantially better volumes out of Central Appalachia and more modest gains from the Illinois Basin and the Powder River Basin. On the improved demand picture for the year, eastern bituminous regions — CAPP, NAPP and SAPP — are now forecast to beat 2016 production levels by a strong margin. A firmer natural gas strip, easing coal retirements during the year and stronger seaborne metallurgical markets all contribute to the improved outlook. The markets for Illinois Basin and Southern PRB are also projected to rebound by 35 million tons this year on improved price competitiveness.
The chart below compares the current production forecast with recent history. Electric-sector demand is projected to grow from 657 million tons in 2016 to 675 million tons in 2017, before coming under additional pressure in 2018. Lower natural gas prices combined with additional coal retirements will tend to keep coal generation demand close to 600 million tons per year from 2019 through 2025. This year's boost in demand is therefore expected to be short-lived, with the overall coal market, which comprises domestic demand and exports, projected to decline by 83 million tons by 2021.
Production outlook — Powder River Basin
MSHA production reports for the second quarter indicate that demand for PRB coal was somewhat less than anticipated despite firm natural gas prices. S&P Global Market Intelligence now projects 17 million tons of production growth in the PRB compared to 2016, with surplus coal inventories reduced compared to 2016. Firmer natural gas prices are expected to offset relatively light demand so far this summer. Powder River Basin 2017 production, Northern and Southern, is projected at 336 million tons, 5.3% higher than 2016. Demand levels for non-PRB western coal have held firm, limiting intrabasin growth opportunities for PRB mines.
Production outlook — Illinois Basin
Increased availability of Marcellus/Utica shale natural gas into the Midwest has pushed Illinois Basin producers to discount spot coal more heavily than other bituminous regions so far this year. However, higher natural gas prices through July have supported higher tonnage than 2016. S&P Global Market Intelligence forecasts 2017 Illinois Basin production at 115 million tons, 17 million tons higher than 2016. Natural gas prices are expected to move downward by 2019, with shale gas deliverability into the Midwest tending to drive coal volumes down. Growth in Illinois Basin volumes post-2018 will depend principally on displacing Appalachian coal and on export market growth.
Production outlook — Appalachian basins
Growth in natural gas takeaway capacity from the Appalachian shale regions is beginning to support higher regional natural gas prices, although significant discounts to Henry Hub prices remain. While much of Appalachian basin coal production has been reduced to core metallurgical, local steam and export steam markets, long-haul thermal markets are forecast to grow compared to 2016. S&P Global Market Intelligence expects 2017 production will total 193 million tons, 12 million tons higher than 2016 levels. Reverse-switching due to higher natural gas prices in 2017 is expected to supplement growth in both metallurgical and steam exports. Production levels in 2018 through 2019 are projected lower due to lower natural gas and further coal retirements. The boost in coal exports that began during the second half of 2016 has continued, and metallurgical production has held firmer than production for domestic steam markets. The growth in 2017 metallurgical exports is forecast to taper by 2018 as competition from international producers cuts export volumes.
Coal forecast methodology overview
Market-indicative coal forecasts produced by S&P Global Market Intelligence represent forward curves for spot-traded instruments, analogous to a strip of contracts, with the shorter tenors (current year, prompt year, plus additional years if available) driven by the observed/assessed market and the longer tenors (typically years 3 through 20 for physically assessed markers and NYMEX futures) driven by fundamental estimates of cash costs of production, accepted returns to capital, regional productive capacity, and forecast supply and demand. For the long-tenored portion of the curve, S&P Global Market Intelligence forecasts prices for specific coal markers and defines the remaining markers via historical spreads.