Coal is likely to remain competitive for power generation for the balance of 2014 in most markets. However, coal production results so far suggest that utility demand has not picked up as much as expected. While a surge in seasonal demand for electricity and associated coal demand appears likely for the third quarter, utility efforts to restore inventories may not begin in earnest until the fourth quarter.
Near-term pricing for spot transactions remains robust, compared to recent history. PRB 8800 continues an upward trend, firming above $14/ton over the next two years, as supply constraints and competitiveness against natural gas boost demand compared to recent history. NYMEX indications for PRB 8800 are available through 2016, with the SNL Energy long-term forecast results picking up in 2017. By 2016, SNL Energy forecasts that PRB price growth will level off as export markets mature and retirements in coal-fired generation cut into domestic swing volumes, creating price competition.
After substantial upward moves in the first quarter, subsequent price growth in spot CAPP coal has been limited by the entry of Illinois Basin volumes and lower-than-expected export. Improved coal generation levels should support stable pricing through 2014-2015. As coal plant retirements pick up, CAPP markets shrink, creating price pressure for remaining producers and a focus on higher value coal (high heat, low-sulfur, and/or favorable locations for domestic or export markets). The market-indicative period for bituminous coal markers is through the end of 2016 for NYMEX CAPP and through 2015 for the NAPP and ILB markers. Illinois Basin and NYMEX CAPP mid-sulfur markers trade in a relatively close price band. SNL Energy expects these markers will compete directly for domestic steam markets and export opportunities. SNL Energy expects price growth to be limited over the next three years by flat domestic demand and intra-basin price competition.
Coal Production and Demand
Production levels through mid-June averaged 18.9 million tons per week (tpw), consistent with estimates over the past quarter. Production levels on a 52-week moving average basis continue to outpace last year, indicating sustainable production levels, with some upside due to low inventories. Given little additional movement in June, SNL Energy expects that utility buying will increase when warmer weather becomes evident.
SNL Energy believes that the second half of 2014 will feature soft export markets offset by modestly improved domestic steam demand, with incremental demand to partially restore inventories. Production data so far this year point to production levels similar to 2013. While SNL Energy forecasts “catch-up” production from the IB and the PRB, overall production levels exceeding 20 million tpw appears less likely outside the summer months.
As the impact of coal plant retirements takes hold over the next three to five years, SNL Energy expects flat-to-declining annual tonnage, with gains driven principally by periods of higher natural gas pricing and a resumption of export growth.
Reverse switching (from natural gas to coal) is expected to boost volumes for the remainder of this year, but it is uncertain how quickly this will happen, with a real possibility power plant inventories will still be low at year’s end. This should sustain volumes in 2015, along with improved export markets. This will be offset by reduced demand from the first wave of coal retirements related to the Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standards. Ultimately, SNL Energy projects that electric sector coal demand will be reduced by 40 million tpy by 2017.
PRB Production Outlook
While the shoulder season might have presented an opportunity for utilities to rebuild inventories, production through May suggests this activity was limited. This could set up a market squeeze in the third quarter if seasonal demand comes in stronger than expected. SNL Energy estimates 2014 PRB production, including northern and southern PRB, at 448 million tons, 9% higher than 2013 levels. With low inventories and a cost advantage against natural gas in place for the summer, demand is set up for these production levels, but it is uncertain how quickly production can expand.
ILB Production Outlook
Preliminary production estimates suggest the region is on trend to close out the second quarter. There may be upside during the summer months based on favorable spreads to natural gas, and positive margins against export coal for its lower rank products. As noted above, ILB’s premium marker and Appalachian coal compete at the margin for utility demand, which may limit additional production upside for 2014. SNL Energy estimates 2014 production of 142 million tons, 7.5% higher than 2013. ILB production should continue to expand despite domestic demand declines for bituminous coal over the next four years, but the recent convergence of its prices against Appalachian coals is expected to limit price growth during this time.
Preliminary production estimates suggest the region is on trend to close out the second quarter. There may be upside during the summer months based on favorable spreads to natural gas, and positive margins against export coal for its lower rank products. As noted above, ILB’s premium marker and Appalachian coal compete at the margin for utility demand, which may limit additional production upside for 2014. SNL Energy estimates 2014 production of 142 million tons, 7.5% higher than 2013. ILB production should continue to expand despite domestic demand declines for bituminous coal over the next four years, but the recent convergence of its prices against Appalachian coals is expected to limit price growth during this time.
Production Outlook for the Appalachian Basins
Production reports for the first quarter indicate Appalachian production is on trend, with stronger performance in Northern Appalachia offsetting weaker Central Appalachian production. With pent-up first-quarter demand and competitiveness against natural gas in place for eastern bituminous coal, there is production upside for the remainder of the year to serve domestic markets. This is offset by ongoing closure of mines in terminal decline and virtually no additional opportunities in seaborne metallurgical markets. However, producers have nearly completed a reorientation of their mine assets around high-quality thermal and thermal/metallurgical coal against flat market prospects over the next four years. SNL Energy estimates 2014 production at 261 million tons, 4% below 2013 levels.
