Top producers in the largest U.S. coal basin are guiding investors to further declines in coal volumes from the region in 2018.

Three coal companies responsible for producing about three-quarters of the coal that comes out of the Powder River Basin issued guidance that collectively would equal a 1% to 6% drop in production. Much of the decline is being forecast by Cloud Peak Energy Inc., which is guiding production lower by 2% to 9% compared to 2017. Arch Coal Inc. is guiding 2018 Powder River Basin shipments will be flat over prior-year production, while Peabody Energy Corp. is expecting shipments to range from flat to down 8% in 2018.

"[W]e aren't aware of any [Powder River Basin] producer that is actually hiking production in 2018, and why would they given weak customer demand and challenged economics. In fact, we wouldn't be surprised if other miners cut their production as well," Seaport Global Securities LLC analyst Mark Levin wrote in a Feb. 19 note compiling the guidance ranges of Powder River Basin producers.

Peabody CFO Amy Schwetz said on a Feb. 7 call with investors that Peabody was thinking about upcoming coal plant closures and its customers' needs for coal in crafting its guidance for 2018. The company has said it will focus efforts on returning value to shareholders and will treat any potential to acquire assets or increase its production volume cautiously.

Arch CEO John Eaves told an analyst on a call in February that the company had sold about 11.8 million tons at around $11.60 per ton out of the Powder River Basin. At that level, Arch is not going to put additional coal tonnage into the market, he added.

"That's kind of our pain threshold," Eaves said. "I mean, we're just not going to keep dumping coal in a market that doesn't want it and we'll back up, reconfigure the mine and do whatever we need to do to operate at lower levels."

Cloud Peak CEO Colin Marshall said at a recent industry conference that his company, which has had some recent success contracting with coal buyers outside of the U.S., that exports are the only growth market Cloud Peak sees for its pure-play Powder River Basin operations.

At the midpoint of the three producers' guidance range, Levin points out, their coal shipments from the region would be down about 3%. Levin noted that if natural gas prices continue to weaken to levels at or below $2.25/MMBtu, the lower end of the three companies' guidance — a decline of about 15.4 million tons of coal year over year — could be realized in 2018.

"It's just too early in the year to know exactly how it will all shake out," Levin said.

In a note earlier in the month, Levin warned it "feels like the U.S. utility coal market could get worse" after natural gas prices dropped again. With 2018 set to bring additional coal plant retirements and winter nearly over, he said, things could get tough for coal plants if natural gas prices do not recover soon.

The Powder River Basin is a top supplier of U.S. coal sold to generate electricity. In 2017, the region's miners increased production 6.6% compared to 2016. However, production slowed as 2017 came to an end, with fourth-quarter 2017 production totaling just 83.4 million tons compared to 90.5 million tons in the same period a year before and 91.2 million tons in the third quarter of 2017.

Daniel Scott, executive director of MKM Partners, attended a coal industry conference in early February and in a note on key takeaways from the event, wrote that a panel of utility buyers expressed they were continuing to short their books in the face of readily available gas and an oversupply of coal. Because there is a lot of gas in the market, he expects pure thermal coal producers to continue to struggle.

"[W]hile we expected the tone of the conference to be cautious for domestic thermal, the level of caution was surprisingly high," Scott wrote. "In particular, a panel of utility buyers, both regulated and merchant, was very bearish. They continue to seek optionality across their coal contracts and across their overall fuel mix. ... They know that short-term buying can lead to price shocks, but won't worry about that until it happens."

Matt Preston, Northern America coal markets research director for Wood Mackenzie, said in an interview that there is also a growing amount of wind generation in the Midwest decreasing demand for Powder River Basin coal, adding to the pressure from natural gas prices and sluggish electricity demand. While large stockpiles of coal at plants have reportedly decreased, Preston said the decline might not have done much to push utilities into the market.

"There's no need to go out and buy a lot of coal," Preston said. "We did see prices get a little stronger in the spot market but if you look at volumes, we're still talking a train here and there. We're not really talking about really long-term contracts being signed at really high prices."

At the same time, Preston noted, coal's U.S. customer base is shrinking.

"There are some very large plants that are burning a lot of coal that are hanging by a thread," Preston said. "If those close, it can be particularly troublesome for some producers."