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Another Peabody mine to shut down amid need for Illinois Basin consolidation

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Another Peabody mine to shut down amid need for Illinois Basin consolidation

Peabody Energy Corp. announced another mine closure in the Illinois Basin, further evidence of what experts have called the start of much-needed consolidation in the region.

Given Peabody's recent announcement that it plans to close the Wildcat Hills thermal coal mine, at least 6.4 million tons of capacity, based on 2018 output, will go offline by year-end. The Wildcat Hills underground mine in Illinois produced about 1.4 million tons of coal in 2018 and will go offline in December, Peabody spokesperson Charlene Murdock said in an email. The complex's Wildcat Hills Mine - Cottage Grove Pit, which stopped producing earlier this year and will complete reclamation by the end of the year, mined 500,000 tons of coal in 2018, Murdock said.

The complex is expected to stop producing due to uneconomic mining conditions and was working with customers to meet their coal demand, the company said in an Oct. 14 news release.

"Peabody continues to navigate through changing U.S. conditions driven by competition with natural gas and subsidized renewables," the company said in the release. "Our focus remains on safety, costs and volumes to maximize competitiveness."

The coal producer announced earlier this year that it will shutter its Somerville Central mine in October; the Indiana operation produced nearly 2 million tons of coal in 2018. Alliance Resource Partners LP also plans to shut down its Dotiki mine in Kentucky, which produced nearly 2.5 million tons of coal in 2018. Experts predicted that the cost of production may be a significant factor in the basin, with lower-cost producers having an advantage.

Seaport Global Securities LLC analyst Mark Levin wrote in a Sept. 30 investor note that one of the analyst's regional contacts believes that annual coal output in the Illinois Basin needs to drop to about 90 million tons but is projected to total about 102 million tons in 2019. At the time, there were at least 5.8 million tons of annual production cuts announced, based on 2018 data from the U.S. Mine Safety and Health Administration, Levin said. Under that assumption, production needs to decrease by about another 8 million tons to better balance the market in 2020, Levin added.

In the 12 months that ended June 30, the basin's coal production increased 7.2% from the year-ago period to about 97.9 million tons, according to data compiled by S&P Global Market Intelligence.

Experts have said the market is or may soon be oversupplied, given that tons normally destined for the international market may be sold in the U.S. amid weak global thermal coal prices.

Andy Blumenfeld, head of market analytics for Doyle Trading Consultants, said in an August interview that planned closures at the time signaled the start of consolidation.

"There will still be some new mines opened," Blumenfeld said. "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."

Alliance announced on its second-quarter earnings call that it reduced output expectations amid logistical challenges and weaker international markets and opted to delay its previously announced plans to increase production in the Illinois Basin.

Alliance President and CEO Joseph Craft III said on the company's second-quarter earnings call that he felt bullish on the longer-term effect of the international market given coal-fired plant development outside the U.S.

"We could transact today and still make money," Craft said. "It's not an attractive price point compared to where we've been, and it's really not an attractive price point to where we think we can sell some tonnage this year in the domestic market."