U.S. coal industry conditions have stabilized at very weak levels by historical standards, but overall Moody’s Investors Service expects a modest decline in the coal sector’s 2014 earnings, as higher priced contracts continue to roll off and low prices for metallurgical coal persist.
Moody’s on Dec. 11 released a major assessment of the coal industry and its status in a weak domestic and international market situation.
Moody’s expects U.S. production volumes to rise by 2%-3% in 2014, off the 2013 trough of 1,008 million tons. It expects that sustained natural gas prices of $3.50-$4.00/MMBtu will prop up demand for thermal coal used in power production through early 2015, with coal’s share of electric generation approaching 40% through mid-2015.
Domestic power producers consume roughly 85% of U.S. coal by volume, but coal’s share of electricity generation has slipped amid historically low natural gas prices and environmental regulations that have discouraged coal consumption, Moody’s noted. U.S. power producers once got about half of their electricity from coal, but coal’s share slipped to about 42% in 2011 and 37% in 2012, when natural gas prices dropped below $2.00/MMBtu in April 2012.
As natural gas prices recovered to $3.50-$3.75/MMBtu in 2013, some coal demand came back, and electric utilities increased coal consumption to 863 million tons in 2013, up from a low point of 824 million tons in 2012.
“We expect production volumes to rise by 2% to 3% next year off the 2013 trough of a little over 1 billion short tons,” said Vice President-Senior Analyst Anna Zubets-Anderson. “Coal’s share of electricity generation will approach 40% through mid-2015, but thereafter will trend lower as coal plants retire and new investment turns to natural gas and renewable capacity.”
The Illinois Basin producers will continue to take market share from Central Appalachia, but both basins will face price pressure, Zubets-Anderson said. Central Appalachian thermal producers like James River Coal will face the most challenges due to mine depletions, fuel substitution, coal plant retirements and high labor costs, Moody’s said.
Demand for coal from the Powder River Basin in Wyoming and Montana will remain more volatile than demand for coal from other regions, while increased supply will cap prices only marginally above the cost of production. Among companies in the Powder River Basin, Cloud Peak Energy is better able to withstand weak prices, while Arch Coal needs a healthy price recovery to stop “burning cash,” Moody’s said.
While demand and prices should be steady for Northern Appalachian coal through next year, beyond that plant retirements and competition from cheap natural gas will pose a threat.
“Export markets for US coal will remain weak in 2014,” Zubets-Anderson said. “Met coal producers face a sluggish global steel industry and additional supplies coming online in Australia, while a surplus of thermal coal in Europe and Asia will limit price recovery in the seaborne markets.”
Export markets for U.S. coal will remain weak in 2014, Moody’s added. Met coal producers such as Walter Energy and Alpha Natural Resources face a sluggish global steel industry and additional supplies coming online in Australia.
The breakpoint for U.S. coal is around the 40% electricity share mark
“We could change our outlook for the US coal industry to positive if coal’s share of electricity generation rises above 41%, met coal prices increase above $175, and coal inventories at utilities decline below 165 million short tons,” said the report. “Our outlook could change to negative if coal makes up less than 38% of electricity generation, met coal prices persist below $150, or the utilities’ coal inventories rise above 185 million tons.”
Moody’s expects no meaningful growth in domestic coal consumption for the foreseeable future, even though the U.S. Energy Information Administration expects total electric generation to grow by roughly 10% over the next decade. “We estimate that alternative power sources will capture the growth in electric generation, cutting coal’s share to about 35% by 2025, from roughly 39% in 2013,” the report said. “We expect total coal consumption to remain relatively flat, as larger coal-fired plants increase power production, which will compensate for retired coal capacity.”
The U.S. coal industry will have to weather a series of coal plant retirements that are being caused mainly by new environmental regulations, including the federal Mercury and Air Toxics Standards (MATS).
“We expect most future retirements to affect older and smaller coal plants in the US East, but shut downs will continue to impact producers in all coal basins,” Moody’s said. “In November 2013, the Tennessee Valley Authority announced plans to shut down eight Alabama and Kentucky coal-fired units that took almost 10 million short tons of coal in 2012 from producers across the country. Those deliveries included coal from Powder River Basin (PRB) mines owned by Peabody Energy (Ba2 stable) and Arch Coal (B3 negative), as well as Illinois Basin (ILB) mines owned by Foresight Energy (B2 stable), Armstrong Energy (B3 stable) and Murray Energy (B3 stable). In July 2013, FirstEnergy Corp. (Baa3 negative) said it would shut down its 1,710 MW Hatfield’s Ferry plant in Pennsylvania—a large, efficient plant close to Northern Appalachia (NAPP) coal providers—because of the capital investments necessary to comply with MATS.”