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Houston — As El Nino continues to moderate weather conditions across much of the US, the effects could reduce coal burn as low as 636 million st in 2016 with Central Appalachia producers bearing the brunt of the cutbacks, a Morgan Stanley analyst said Monday.

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Higher cost mines in Northern Appalachia, the Illinois and Powder River basins also would feel the impact of the cuts, which would need to take place to rebalance the market if gas prices stayed below $2/MMBtu, said Evan Kurtz, a New York City-based equity analyst. NYMEX January gas futures settled at $1.894/MMBtu Monday.

"Obviously the vast majority of CAPP thermal mines can't compete with gas at this level," Kurtz said. "They will hang on as long as they can, but most of CAPP thermal mines will go away."

Morgan Stanley, in its official October forecast, projected the industry would burn roughly 768 million st of coal in 2016 with natural gas prices averaging $3.10/MMBtu, down slightly from a projected burn of 774 million st in 2015. The US burned 849 million st in 2014.

If gas prices averaged $2.50/MMBtu in 2016, utility coal burn would total 736 million st, while utilities would need to burn only 636 million st in 2016 if gas prices averaged $2/MMBtu, according to Morgan Stanley's forecast.

CAPP's coal production totaled roughly 116 million st in 2014, roughly half of which was metallurgical coal.

With nearly all of its thermal coal production potentially falling out of production, other basins also would need to reduce production, he said.

"That's just to keep inventories from continuing to grow," he said. "Ultimately, it will have a positive pricing impact to cut production that much, but that's just to rebalance the market."

Coal production already has dropped roughly 9% this year to 847.5 million st, while utility coal consumption has dropped 7% to 768.3 million st through the week ended December 10, according to the latest data from Bentek Energy, a unit of Platts.

While low gas prices will have the greatest impact on coal-to-gas switching, utilities will be further incentivized to buy natural gas as coal contracts roll off the books next year, said Joe Aldina, a New York City-based analyst for Wood Mackenzie.

That is because across the industry, many one and two-year contracts that were signed in the last year or two will expire next year, allowing utilities to switch over to more economical natural gas in 2016, Aldina said.

"There will be a lot rolling off in 2016 for those utilities with operational flexibility to ramp down their coal burn," he said.

--Jeffrey McDonald,
--Edited by Richard Rubin,