Viewpoint: Tough US coal market to persist in 2016

OREANDA-NEWS. December 29, 2015. The coal industry in 2015 has struggled through one of the most difficult markets that many long-time market participants can remember.

Very low natural gas prices, unusually warm weather and government regulations have all contributed to reducing coal demand and have put downward pressure on coal prices.

And none of those factors is likely to abate in the first half of 2016.

"There is no reason to be terribly hopeful for 2016," the National Mining Association (NMA) said today.

Rising stockpiles of coal have some producers concerned that demand next year could drop even lower than what was seen in 2015.

This year there have been significant declines in over-the-counter thermal coal and direct-delivered steam coal prices.

On 24 December 2014, prompt quarter over-the-counter 12,500 CSX coal was assessed at \\$50.50/st FOB rail, while prompt year CSX was assessed at \\$50.60/st. On 24 December this year, those two contracts were priced at \\$37.75/st and \\$38.35/st, a decline of 25pc and 24pc, respectively. In the west, Powder River basin (PRB) over-the-counter coal on 24 December 2014 was assessed at \\$12.35/st FOB mine for the prompt quarter and at \\$12.70/st for the prompt year. On 24 December this year, the prompt quarter and prompt year PRB were assessed at \\$9.80/st and \\$9.60/st, representing declines of 20pc and 24pc.

The precipitous decline in natural gas prices this year has been one of coal market participants' biggest concerns.

Spot prices at the Henry Hub this month have touched their lowest level since 1999, while prices forJanuary delivery have reached their lowest in more than 20 years.

A particularly warm winter is negatively affecting gas and coal prices by driving down demand for electricity and heating. Higher-than-average temperatures in the US may persist into the first quarter of 2016 and keep Nymex gas futures below \\$2/mmBtu, analysts with Goldman Sachs said on 21 December. Prices are expected to recover in subsequent quarters but likely will not exceed \\$3/mmBtu through next year. That could keep coal-fired dispatch out of the money for many power plants through 2016.

US coal output has fallen by nearly 10pc this year from 2014, reflecting a major drop in utility demand. For this year through 12 December, domestic mines produced 855mn short tons (776mn metric tonnes), down by 94mn st from the year-earlier period, the US Energy Information Administration (EIA) estimated on 17 December. In October, Peabody Energy lowered its US sales outlook for this year by 5mn short tons (4.5mn metric tonnes) as customers deferred shipments into 2016.

While supply is diminishing, coal demand seems to be falling faster. EIA data from 24 December showed coal plants in October accounted for 31pc of US generation, down from 35pc a year earlier. The share of gas rose to 35pc from 31pc. Gas-fired generation, in absolute terms, increased by 13pc, while coal-fired output fell by 12pc.

Coal trading next year could be hampered by towering coal stockpiles.

In October 2015 more than two-thirds of US power plants held more than 60 days of coal stockpiles, EIA data show. Nationally, power plants could on average burn bituminous coal for 87 days and burn sub-bituminous coal for 80 days with the stockpiles the power plants held in October.

Bituminous coal stocks were 11pc higher in October than a year earlier, while sub-bituminous stocks were 57pc higher than in October 2014.

Some market participants expect coal stocks to top 100 days of burn in 2016, which would greatly dampen power plants' buying needs.

With all of the factors that made 2015 such a difficult year for the sector expected to continue, market participants are setting their sights low for 2016.