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US thermal coal production cuts and consolidation expected as export and domestic markets remain weak: analysts

Highlights

Production cuts seen needed in Illinois Basin

Hallador has 88% of 2020 production contracted

Houston — Although the seaborne thermal coal market had a slight price rebound during the third quarter, US exports are expected to remain low this year, forcing more production cuts and consolidation as the domestic market remain bearish as well, analysts said this week.

Despite the slight third-quarter price rebound in the CIF ARA market, "we estimate that most US exports are still not economical at current spot prices," B Riley FBR analysts Lucas Pipes, Matthew Key and Daniel Day wrote, noting dampened seaborne thermal coal demand due to a "sharp rise" in European carbon allowance prices and cheap natural gas and imported LNG.

The B Riley analysts forecast the API2 price remaining near $60/mt in the medium term before stabilizing at $66/mt in late 2020.

"We also note that European natural gas-fired power generation is nearly at capacity, meaning any incremental power demand from a colder-than-expected winter would likely need to be met by increasing the utilization of coal-fired plants, a potential positive catalyst," they wrote.

However, according to Fitch Solutions, "we do not expect growing foreign demand for US coal to supplant weaker domestic demand or reverse the industry's decline."

CONTRACTING NEXT YEAR

Currently, Hallador Energy had contracted 88% of its 2020 production at an average of $40.75/st, which, according to B Riley, is the highest percentage of contracted volumes among producers within their coverage.

Consol has 80% of its production contracted, and, "notably, [Consol] was able to reach export extensions for 2020 at prices that were not materially changed from 2019," the report said.

Alliance Resource Partners reported 23.9 million st of production under domestic contract for next year, plus 100,000 st for export, "meaning nearly all of the company's exports still needed to be priced at the end of 2Q," the report said. "We believe [Alliance's] ability to contract tons for 2020 during 3Q will serve as critical barometer of the export market for US producers."

According to Seaport Global analysts in a report last week, Alliance "shipments, however, won't be flat with 2019 next year; we project they will be much lower."

Additionally, they noted investors believe a distribution cut could be imminent from the producer.

Already both Alliance and Peabody Energy ceased production at Illinois Basin mines.

According to Pipes, Key and Day, "we believe that additional production curtailments are necessary, particularly in the ILB region."

"Since the announcement in June that Arch Coal and Peabody Energy plan to form a JV that would tie together their PRB and other western assets, we believe producers in all US basins have considered consolidation in order to best position coal to compete with natural gas and renewable energy in the power generation mix," the B Riley analysts added.

Additionally, in terms of adding competition to the market, according to Fitch, "as coal-fired plants retire, demand for thermal coal will decline, increasing competition among domestic miners."

Through 2028, 18.4 GW of coal-fired capacity will be retired, Fitch noted.

-- Olivia Kalb, olivia.kalb@spglobal.com

-- Edited by Derek Sands, newsdesk@spglobal.com