US coal producers expect more cuts

OREANDA-NEWS. August 03, 2015. Major coal producers speaking on the second quarter earnings circuit this week highlighted decreasing US thermal coal production and predicted even steeper cuts as excess supply still pervades the market.

Producers estimate bigger production cuts this year than the US Energy Information Administration's projected decline of 75mn short tons (68mn metric tonnes). The government agency's latest Short-Term Energy Outlook said US coal production in 2015 will fall by 7.5pc to 921.5mn st.

Arch Coal this week said it expects US coal production to fall by as much as 90mn st this year. Arch added that its estimated decline is conservative, predicting that many mines idled earlier this year will find it hard to resume production.

Arch chief operating officer Paul Lang said smaller idled mines in Central Appalachia are essentially "gone for good," and in other regions the cost to restart idled mines is prohibitive.

"Supply is coming down a lot faster than we anticipated," Arch chief executive John Eaves said.

Arch's own production should decline by 6mn st, or less than 4.5pc, based on the company's guidance. It projects an output range of 126mn-130.8mn st this year, compared with 134mn st produced last year.

Peabody Energy expects US coal demand to fall by 90mn-100mn st this year, with a similar downward trajectory for production.

Alliance Resource Partners pointed out the double-digit declines in the Illinois basin and northern Appalachia in the second quarter compared with the first quarter and said it expected more supply cuts.

Arch expects production declines to be more steep in the eastern US than in the west. And the pure-play Powder River basin (PRB) producer Cloud Peak Energy says production there should fall by 30mn-40mn st this year from last — a year over year decline of 7.1-9.6pc.

But with coal stockpiles in the electric power sector up by 28pc in May year over year to 175mn st, according to EIA, production declines have yet to lift prices.

While output declines should benefit producers overall by boosting prices, idling a mine removes revenue but still incurs power costs. And closing a mine starts the clock for reclamation obligations that can be extremely costly.

Shale gas counterparts are experiencing a similar dynamic. Even though gas prices are low, individual producers may find it hard to stop or slow production because of legacy take-or-pay delivery contracts.

And fixed-price forward sales still insulate many coal and gas producers from the pain of price declines.