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OTC market: US thermal coal market plagued by bleak fundamentals

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OTC market: US thermal coal market plagued by bleak fundamentals

Coalprices were mixed during the week ended May 5 as fundamentals continue to weighon the U.S. thermal coal market.

Pricesfor rail-delivered Central Appalachian coal headed lower, while those of thePowder River Basin posted lackluster gains.

Whileproducers have become more aggressivein cutting coalproduction this year,a combination of factors continues to weigh on the domestic thermal markets,including low natural gas prices and elevated coal stockpiles. Weakness ininternational coal markets has added to domestic producers' woes as U.S. coalthat would otherwise be shipped overseas is absorbed into the nation's supply.As the U.S. dollar has strengthened relative to the currency of othercoal-producing nations, it has cushioned the impact of falling internationalcoal prices on producers that operate outside the U.S.

ThroughMay 5, prompt-month natural gas futures are down 11.1% year-to-date and 24.1%year over year to $2.076/MMBtu. As natural gas prices have weakened, coalstockpiles have grown.

Throughthe end of February, power-sector coal stockpiles were 25.4% above the 10-yearaverage to 188.9 million tons, according to the U.S. Energy InformationAdministration, which estimated days of burn at 22.8% and 44.2% above thefive-year average for bituminous and subbituminous coal, respectively.

Meanwhile,the international coal market is not in much better shape as prompt-month API2 swapfutures are down 2.8% year-to-date and 22.3% year over year to $46.40/tonne.

Inits latest short-term outlook,the EIA cited weak global fundamentals and low international coal prices aslimiting U.S. coal exports through 2017, as "lower mining costs, cheapertransportation costs and favorable exchange rates … continue to provide anadvantage to mines in other major coal-exporting countries."

Asof May 5, the Australian dollar has improved 2.7% year-to-date but is stilldown 6% year over year relative to the U.S. dollar, while the Colombian peso is23.6% weaker relative to the U.S. dollar year over year, according to SNLEnergy data.

Amida weak U.S. coal export outlook, the EIA expects that coal-fired generationwill fall behind gas-fired generation as the nation's top provider ofelectricity for the first time annually in 2016. The U.S. government trimmedits short-term outlook for power-sector coal demand to 689 million tons in2016, down 3% versus the prior outlook, and expects it to recover to 706million tons in 2017, down 2.1% versus the prior outlook.

Longer-termprojections have U.S. coal consumption and production sliding because of market andregulatory factors.

Coalproducers are struggling to balance running their operations efficientlyagainst maintaining market share, and higher-cost production has fallen off.After seeing the largest coal production decline on record in 2015, thegovernment expects the supply mix to shift among coal-producing regions.

In2006, the Interior region, which includes the Illinois Basin, accounted for 13%of production, and the EIA expects that to grow to 20% of production in 2016and 2017, as production declines at a slower rate than that of the Appalachianand Western regions.

EIAcoal production estimates show that all coal-producing regions are being hit bythe weak market. During the week ended April 30, domestic coal productiontotaled 11.3 million tons, down 35.3% versus the year-ago week, with theAppalachian region seeing a 40% decline. Year to date through April 30, totaldomestic coal production is down 33.4% to 211.2 million tons, with the Westernregion accounting for approximately 52% of that decline.

Inan April 14 research report, FBR & Co. analyst Lucas Pipes wrote that the "unprecedented"supply response could alleviate the current stockpile glut, and the prospect ofa cyclical recovery in natural gas prices means that production would have togrow in 2017 to meet coal demand.

SNLEnergy is an offering of S&P Global Market Intelligence. Market prices andincluded industry data are current as of the time of publication and aresubject 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.