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2016 could bring about largest US coal production decline on record

Asproducers contend with mounting stockpiles and falling consumption this year,the U.S. Energy Information Administration projects the largest annualproduction decline on both a percentage and tonnage basis since the beginningof record keeping in 1949.

Inits latest "Short-Term Energy Outlook," the government agencyprojects that 2016 coal production will fall 16.7% to 746 million tons, a 0.9%decline versus the prior outlook, before recovering 4.3% to 778 million tons in2017. If 2016 production meets the EIA's projection, it would mark a greaterthan 25% decrease from the 2014 total of 1 billion tons.

Thegovernment agency expects the largest production cuts to come from theAppalachian and Western regions. At 15% and 20%, respectively, those cutscompare to a drop in Interior region production of 9%.

Thefalling production comes as producers struggle to rationalize production in theface of falling demand. According to the government agency, domestic coal-firedgenerators burned an average of 948 million tons annually from 1997 through2015. According to the "Short-Term Energy Outlook" released May 10,the government agency lowered its latest forecast for 2016 by 1.1% versus theprior outlook to 682million tons, a 7.8% drop year on year.

Power-sectorcoal consumption accounts for more than 90% of domestic coal consumption,according to the EIA. The government agency blamed falling coal demand on thisyear's mild winter, low natural gas prices and coal plant deactivationsstemming from a combination of competition with natural gas-fired plants andburdensome environmental regulations.

Lastmonth, the government had projected that coal would account for roughly 31% ofthe nation's electricity needs to natural gas' 33.9% in 2016, but the latestprojections have coal providing roughly 30.5% of generation to natural gas' 34%.

Theshift in coal consumption patterns has the nation's coal stockpiles rising.According to the government agency, power-sector coal stockpiles ended Februaryat 189 million tons. "This pattern deviates from the normal seasonalpattern where stockpiles decrease during the winter months," the reportsaid. "U.S. end-of-February coal stockpiles were still at high levels,despite the coal plant retirements that have occurred in recent months."

TheFebruary stockpile level is 25.4% above the 10-year average for the month andnearly flat versus the prior month, according to the EIA, and the governmentagency estimated February days of burn were 22.8% and 44.2% above the five-yearaverage for bituminous and subbituminous coal, respectively.

TheEIA projects that secondary coal stockpiles will end the year at 184.3 milliontons, 1.4% above the prior outlook, but down 10.1% year over year.

Meanwhile,the EIA expects U.S. producers to find little relief in the global coalmarkets.

"Slowergrowth in global coal demand and lower international coal prices havecontributed to a decline in U.S. coal exports," the report said. "Lowermining costs, cheaper transportation costs, and favorable exchange rates areexpected to continue to provide an advantage to mines in other majorcoal-exporting countries compared with U.S. producers."

Thegovernment expects coal exports to total 59.1 million tons in 2016, down 20.1%year over year but up 1% versus the prior outlook, before falling 4.4% in 2017to 56.5 million tons, a 0.3% decline versus the prior outlook.