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US thermal coal prices show little movement as bearish fundamentals persist

U.S thermal coal prices were mixed during the week ended June 8, as many headwinds facing domestic coal producers persisted.

Central Appalachian coal prices were largely in line with those of last week, while Powder River Basin coal prices along the front and back ends of the forward curve moved in opposite directions.

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During 2016, producers aggressively cut coal production in the face of market headwinds, including low natural gas prices and elevated coal stockpiles. Weakness in international coal markets added to domestic producers' woes as U.S. coal that otherwise would have been shipped overseas was absorbed into the nation's supply.

During the second half of 2016, the natural gas market moved higher as natural gas storage inventories increased at a slower-than-average rate. The market had approached $4/MMBtu, but a mild winter brought the market lower. Through June 8, prompt-month natural gas futures are down 9.0% year to date but up 15.7% year over year to $3.028/MMBtu.

Analysts say stockpiles have been keeping a lid on the domestic thermal coal market and as utilities work through them, the domestic thermal market will become more volatile. Through the end of March, power-sector coal stockpiles were 0.1% above the 10-year average at 163.9 million tons, according to the U.S. Energy Information Administration, which estimated days of burn at 13.5% above and 22.2% above the five-year average for bituminous and sub-bituminous coal, respectively.

Meanwhile, prompt-month API2 swap futures are down 8.2% year to date but up 55.0% year over year at $78.65/tonne.

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The EIA has cited weak global fundamentals and low international coal prices as limiting U.S. coal exports, as "lower mining costs, cheaper transportation costs and favorable exchange rates continue to provide an advantage to mines in other major coal-exporting countries." However, in its latest outlook, the agency boosted its expectations for 2017 U.S. coal exports by 13.2% to 71.6 million tons. That figure is up 13.2% versus 2016, but the EIA expects 2018 exports to slide 14.4% year over year.

As of June 8, the Australian dollar is 3.9% stronger year to date and 1.3% stronger year over year relative to the U.S. dollar, while the Colombian peso is 0.4% stronger relative to the U.S. dollar year over year, according to SNL Energy data.

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EIA estimates show that coal-fired generation fell behind gas-fired generation as the nation's top provider of electricity for the first time annually in 2016, and the EIA expects that trend to continue in 2017. While U.S. generation averages 11.0 million MWh/d, the EIA expects that natural gas will provide 31.4% of the nation's electricity in 2017 to coal's share of 30.9%. The government expects that power-sector coal consumption will total 677 million tons in 2017 before climbing to 687 million tons in 2018.

Longer-term projections for domestic coal consumption and production are bleak and highlight the natural gas market's and government policy's influence in both the short run and the long run.

But so far, government estimates show coal production has increased year over year, with the EIA estimating coal production at 15 million tons for the week that ended June 3. That figure is roughly even with the prior week and up 23.7% from the comparable week in 2016, bringing year-to-date production 17.7% higher year over year to 329.3 million tons.

Meanwhile, the latest data from the EIA shows mixed results for U.S. power-sector coal demand and stockpiles. Coal generation climbed significantly year over year in March, allowing for a below-average stockpile build in spite of increased coal production. But after three consecutive months of coal dominance, natural gas provided the largest share of the nation's electricity over the same period.

SNL Energy is an offering of S&P Global Market Intelligence. Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas and coal index prices, as well as forwards and futures, visit our Commodities pages.