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Coal

Illinois Basin coal market faces uncertainty with low gas prices, rationalization

Agriculture | Energy | Coal | Electric Power | LNG | Natural Gas | Oil | Metals | Steel | Petrochemicals | Shipping

Commodities 2020

Coal

Platts Global Coal Alert

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Coal | Coking Coal | Thermal Coal

Moody's sees negative 2020 US thermal coal outlook on smaller stack share, lower exports

Illinois Basin coal market faces uncertainty with low gas prices, rationalization

Houston — Coal burn falls because of low natural gas prices

More might need to be pulled from the market

Coal demand may be down and mines may be closing, but coal is still moving in the Illinois Basin, market participants said this week.

"We're hanging in there," said an official with an Illinois Basin producer. "Export markets are pretty slow, but we're still shipping some, and hoping we can get more of that business going next year, and most of our utilities are taking deliveries ... we're just trying to keep things on an even keel."

Inexpensive natural gas continues to have a negative impact on coal demand. Through Friday, the Henry Hub natural gas futures contract has averaged $2.545/MMBtu this year, compared with $2.873/MMBtu in the year-ago period.

In Florida, which is the biggest domestic market for IB coal outside of Indiana, Kentucky, and Illinois, one utility buyer said cheap gas is putting "a hurt on the coal industry."

"If I could sell coal, I have a big mountain of it," said the buyer, adding this his company's gas units are dispatching at roughly 70% while the coal units are at roughly 30%.

"I'm still burning coal, but I'm not going to issue an RFP," said the buyer. "If I do buy, it will be spot, but from everything we are seeing forecast-wise, next year is supposed to be even worse for gas."

The US Energy Information Administration, in its most recent Short-Term Energy Outlook, projects physical Henry Hub to average $2.64/MMBtu in 2020, while the 2020 strip on Friday for Henry Hub futures averaged $2.421/MMBtu.

"Its times like these we want to keep our customers close, and satisfied, and happy," said an official with a second Illinois Basin producer.

MINE CLOSURES

In an environment of low demand and low pricing, supply rationalization is a healthy response, and the basin continues to process the impact of mine closures.

"Closures are really just reflective of operations that aren't competitive," said the first IB producer.

Peabody Energy announced this week it is closing its Wildcat Hills mine in Saline County, Illinois, by mid-December, citing "uneconomic mining conditions." The announcement comes only a few months after it said it would close its nearby Cottage Pit mine.

The two mines combined to produce 1.74 million st in 2018, according to US Mine Safety and Health Administration data.

But how much rationalization is enough, and who else will be willing to throw in the towel?

According to EIA data, production in the basin on an annualized basis would total 106.6 million st, down just 0.1% from the 2018 total.

FORESIGHT, MURRAY QUESTIONS

The question is all the more pertinent when one considers the possibility of a bankruptcy filing for either Foresight Energy or Murray Energy, both of whom have announced this month they are working with lenders to avoid defaulting on certain loans.

Foresight is the second-biggest producer in the Illinois Basin, producing 23.3 million st in 2018, while Murray produced 5.3 million st from a few mines in Western Kentucky it acquired in bankruptcy from the now-defunct Armstrong Energy.

"Foresight being a dominant player, that is a tremendous chunk of tonnage," said the second producer. "I don't expect we would lose that, but I do expect it could go down by 5 million-10 million st."

In an October 1 filing with the US Securities and Exchange Commission, Foresight said it chose not to make an interest payment due that day and would use a 30-day grace period to "evaluate our options."

Given the current glut of gas in Europe, the export market for IB coal doesn't look positive heading into next year, while domestic demand is also likely to limp along for the same reason.

But don't count out the Illinois Basin yet, the second producer said.

"I feel like we're going to be in the doldrums for six to nine months, but we could be in a different world this time next year," said the official. "The biggest uncertainty is what Murray and Foresight are going to do, but prices can't stay down forever."

S&P Global Platts assessed 11,500 Btu/lb, 5 lb SO2/MMBtu FOB barge coal at $35.50/st Friday, unchanged from the prior week, based on a survey of market participants.

-- Andrew Moore, andrew.moore@spglobal.com

-- Edited by Andrew Moore, newsdesk@spglobal.com