Consultant: Coal's Pain Not Over Yet

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Coal's fall from grace in the U.S. electric power market has been dramatic, and while demand for that fuel has not yet bottomed out, it is coming close to an equilibrium point where demand and supply will be more closely balanced, an energy consultant told the 118th National Western Mining Conference & Exhibition in Denver, Colorado on Tuesday.

Demand for thermal coal from U.S. utilities fell 297 million short tons, or 29%, between 2007 and 2015, Ted O'Brien, chief executive at Doyle Trading Consultants (DTC) (Grand Junction, Colorado), told several hundred attendees during the opening day of the annual mining conference sponsored by the Colorado Mining Association (CMA) (Denver). In round numbers, O'Brien told attendees, utility demand fell from slightly over 1 billion short tons in 2007 to about 710 short tons in 2015. He predicted utility demand would fall further, to about 665 million short tons, this year.

In his presentation, titled "U.S. Coal Industry: Down but Not Out," O'Brien said the domestic thermal coal market remains "very over-supplied, which has caused soft pricing. In several markets, natural gas is much cheaper, and it isn't close." He said the new rule of thumb is that coal will be at a competitive disadvantage to gas until gas rises to between $3.25 per million British thermal units (MMBtu) and $3.50 per MMBtu. This week, gas is selling for slightly under $2.00 per MMBtu on both the cash and futures markets.

"In the U.S., coal is fighting a two-front war--against gas and regulation," O'Brien commented. "Coal is in the cross-hairs in the U.S., but it is not going away." While environmental regulation has cut deeply into coal use among utilities, the loss of market share to natural gas has been "catastrophic," he said. Over the last 18 months, low-priced gas has displaced an estimated 150 million short tons of coal use among electric utilities.

The DTC chief said he saw a future where domestic coal demand would be rebalanced, but at a lower, more sustainable level compared to current demand. He didn't offer a prediction on when that would happen or at what price the fuel would sell for when demand and supply came into balance.

Overseas, the outlook appears as bleak. The seaborne market is over-supplied, and thermal coal is selling for a 12-year low overseas, he said. Collapsing demand in China has shifted the focus to India, but that country's coal imports were flat last year compared to 2014. "People had assumed that India would sop up excess supply, but that's not happening," he said. "In Asia, customers are saying, 'Oil is cheap, gas is cheap, why would we need U.S. coal?' " U.S. coal exports have fallen from about six million short tons per month in 2012 to about one million short tons per month now, he estimated. A strong U.S. dollar, which makes U.S. goods more expensive overseas, has not helped coal companies trying to sell overseas.

Declining demand domestically and overseas has taken its toll on coal companies in recent years as waves of mine closures, asset sales, mergers and bankruptcies have transformed the landscape. "It's a fairly toxic environment right now," O'Brien told the CMA attendees. Investors are less willing to fund coal companies, he said, and investor demand for coal company debt or equity has "evaporated." Bonds sold earlier this year by Murray Energy Corporation (St. Clairsville, Ohio) and Peabody Energy Corporation (NYSE:BTU) (St. Louis, Missouri) now are trading for between seven and 11 cents on the dollar.

The outlook is not nearly as dire for Rocky Mountain coal companies, most of whom operate in Colorado, Utah and Wyoming, the DTC chief said. There are five coal-burning power plants in Colorado, and locally mined coal means lower transportation costs. He said the impact on Rocky Mountain producers was manageable due to lower transportation costs.

"Coal has a big future in Colorado, but future demand levels remain uncertain," O'Brien told conference attendees. But he did note that, on a percentage basis, coal production in Colorado fell faster than national coal production between 2010 and 2015. U.S. coal production fell around 17%, from about 1.1 billion short tons in 2010 to 901 million short tons in 2015. Over that same time, the state's coal production fell approximately 25%, from 25.3 million short tons to 18.9 million short tons.

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