Two major coal producers recently announced plans to shut down one of their Illinois Basin coal mines amid weak market conditions, a move that may signal the start of consolidation in the region.
Experts said previously that the basin may be oversupplied as export thermal coal prices fell from the beginning of the year and U.S. domestic utility demand continues to decline.
Peabody Energy Corp. recently said it will close its Somerville Central mine, an operation in Indiana that produced nearly 2 million tons of coal in 2018, in October. Alliance Resource Partners LP followed suit shortly thereafter with plans to close its Kentucky-based Dotiki mine, which produced nearly 2.5 million tons in 2018. Both mine closures stem from weak market conditions in the region, the companies said.
Export prices on thermal coal sold to Europe and Asia have dropped over the last few months, making it more difficult for U.S. producers to compete abroad. Miners who ship their coal down the Mississippi to the Gulf of Mexico also struggled to move their tons due to high and swift water that delayed shipments.
Andy Blumenfeld, head of market analytics for Doyle Trading Consultants, said the lower-cost miners in the region, such as longwall producers, will be better positioned going forward. The planned mine closures are the start of needed consolidation in the basin, he said.
"There are going to be other higher-cost mines and there's going to be some surprises for certain out there, but there is going to need to be some contraction in the Illinois Basin supply," Blumenfeld said. "There will still be some new mines opened. Some of these are going to be low-cost operations that will displace higher-cost production, but ultimately there's going to have to be more contraction in the basin."
As larger coal producers try to place tons in the domestic market that they would normally try to export under better market conditions, he said, smaller companies in the region that primarily sell their coal domestically, such as Hallador Energy Co., may be affected. As contracts roll off, pressure will increase on prices as supply grows.
Matt Preston, Wood Mackenzie's research director of North America coal markets, said smaller companies may face less investor scrutiny, allowing them to trim margins more so than their larger counterparts. Companies' size is not necessarily a key factor in their chances of survival, he said.
"If you have good assets and are reasonably well-managed, you're going to be okay," Preston said.
In general, Wood Mackenzie thinks the Illinois Basin is doing fairly well. Producers may be poised to take over some of the remaining Central Appalachian market and compete with their Northern Appalachian counterparts, he said.
"We think that Illinois Basin of all the basins probably has the best chance of more or less maintaining production levels. … The good producers in Northern Appalachia will do all right, but there's going to be some fringe losses," Preston said. "There's still plants retiring. There's still very low-cost gas. It's unclear how much more high-sulfur coal the international market can take."
Several coal producers with Illinois Basin operations said on their second-quarter earnings calls that they view the decline in the export market as cyclical rather than structural, noting that other nations have a growing demand for coal.
Alliance lowered its 2019 coal sales and production volume guidance due to the weakened export sector and logistical issues. Alliance President and CEO Joseph Craft said if the export market conditions persist, the volume increase domestically could weigh on high-cost producers, causing them to go out of business or pull production back.
"That will provide us to have an opportunity to sell in the domestic market that we would be able to pick up and get that market uplift," he said on a July 26 earnings call. "That gives you that balance to where, year over year, we feel like our earnings will be stable whether we're in the export market or the domestic market."
Foresight Energy LP President and CEO Robert Moore said on an Aug. 7 earnings call that the Illinois Basin along with all the other basins would benefit from consolidation whether through a merger or joint venture.
"We're not actively engaged in any discussions, but it's something that I think, as an industry, people are looking at more frequently than they have in the past," he said. "And we'll see what transpires over the next three to 12 months, but I would expect to see some additional consolidation in this space."