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US coal exports rose 13.2% YOY in '18; Asia likely to drive 2019 seaborne demand

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US coal exports rose 13.2% YOY in '18; Asia likely to drive 2019 seaborne demand

U.S. producers increased coal and petroleum coke exports 13.2% year over year in 2018, and several analysts said the industry's eyes should be on Asia for potential growth opportunities in 2019.

Domestic miners shipped 144.7 million tons of coal and petroleum coke to other nations last year, up from 127.9 million the year prior, according to data compiled by S&P Global Market Intelligence. The top 16 destinations for the fuels imported 122.5 million tons in 2018, a 14.3% increase from 2017.

Though most coal producers have pressed pause on investments in new mines or additional capacity, Arch Coal Inc., which has customers in Europe, South America and southeast Asia, recently announced plans to develop its long-discussed Leer South project in West Virginia thanks to strong demand worldwide. On a February earnings call, Arch CEO John Eaves described the global marketplace as "undersupplied" with little new capacity coming online.

"Based on the work of industry consultants and our own internal assessments, the global coking coal market will need to add between 70 [million] and 80 million tons of new productive capacity by 2025 in order to meet the new demand and offset depletion," he said. "That investment simply isn't happening at present, which creates a compelling opportunity."

India dominated the U.S. export coal space in 2018, accounting for 13.1% of the coal and petroleum coke sold abroad. The country imported 19 million tons, an 11.9% uptick from 2017 and nearly 5.7 million more than Japan, the second-largest importer.

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India "continued to be the growth driver" in 2018, with coking coal imports increasing 5% last year, said Peabody Energy Corp. executive vice president and CFO Amy Schwetz on a Feb. 6 earnings call.

"In 2019, we'd expect India to become the second-largest met coal importer behind China," she said, adding that before long, India will top the list because it lacks the "domestic quantity and quality to meet their steel-making needs."

Clarksons Platou Securities analyst Jeremy Sussman said he forecasts that Indian imports will continue in the thermal and metallurgical sectors, with overall demand for coking coal more certain.

"On the thermal side, things do ebb and flow a bit more based on what their own domestic production looks like," he said, "but we do, again, expect some modest growth going forward on the thermal side too as India electrifies."

He projects U.S. metallurgical coal exports to India will "likely stay flat or increase from here" while thermal coal exports remain "relatively strong," but the market strength seen in 2018 may be hard to follow.

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A Wood Mackenzie senior research analyst said India's domestic coal supply has grown, but not enough to meet total demand. Illinois Basin coal proved to be "a cost-effective replacement" for petroleum coke, which India banned for fuel use because of its environmental impact, Gregory Marmon said.

"India is going to be the location that's best available for growth options," he said. "The main risk, of course, is their domestic supply."

Consol Energy Inc. sold most of the thermal coal it exported in 2018 to India, according to a recent company investor presentation. James McCaffrey, senior vice president of coal marketing, said on a recent earnings call that Consol sold 4.5 million tons of coal to India last year and expects similar opportunities in 2019.

"So we're starting to build a book in India of end-user customers, which has always been our goal, that we think we can do protracted business with," he said.

While many European nations are moving away from coal, the United Kingdom and Netherlands saw large year-over-year increases in coal imports from the U.S. Tejasvi Raghuveer, industry economist with the U.S. Energy Information Administration, has attributed the relatively high volumes to ports that serve as the first landing point for coal before most of it is likely shipped off to another country.

Western Europe's coal production and reliance on coal-fired power plants is declining, said Benjamin Nelson, senior credit officer and lead coal analyst at Moody's, adding that the United Kingdom saw a significant decline.

When the rate of production decline and usage are out of balance, "it can lead to some volatility in exports," he said. While Europe's longer-term thermal coal trend is negative, there may be some "bumps in the road."

"I wouldn't read too much into any single year," Nelson said, adding that Europe's demand for metallurgical coal is more stable.

China, the world's largest coal consumer, imports little U.S. coal, but a 25% tariff imposed in August 2018 made it even less profitable for U.S. producers to ship the fuel, likely contributing to the 11.2% year-over-year decrease.

Chinese demand is influenced by its internal economic development and policy regarding its support for the coal industry, in addition to trade factors, said B. Riley FBR analyst Lucas Pipes.

"Trade is very high up on the list, and there's some talk that U.S. coal exports to China could benefit directly from a trade deal," he said. "We'll have to see about that."