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US thermal coal environment remains grim with expected drops in production and demand: Seaport

US thermal coal production is expected to continue declining, particularly in the Powder River Basin, as domestic power coal demand drops and the export environment remains grim, Seaport Global analysts wrote this week.

“The outlook for domestic utility coal in the second half of 2019 and 2020 looks pretty grim,” Seaport senior analyst Mark Levin and senior associate analyst Nathan Martin wrote in a note following a Seaport-held conference last week. “This is a function of very weak natural gas prices (most producers will tell you they need at least $2.75-$3.00/MMBtu before demand starts to accelerate), but also a weakening export environment.”

According to Energy Ventures Analysis President Seth Schwartz, the report said, US electric coal consumption will go from 560 million st in 2019 to 554 million st in 2020, compared with 626 million st in 2018. Arch Coal’s senior VP of strategy and public affairs, Deck Slone, also said he expected US electric coal consumption to be down more than 50 million st in 2019 compared with last year.

“This is much less of a decline for 2020 than we are projection, but the fall from 2018 to 2019 is unquestionably pretty severe,” Levin and Martin wrote. By basin, the PRB “takes the biggest absolute hit.”

Schwartz estimated a decline of 106 million st in 2018 to 105 million st in 2019 and 103 million st next year. “We are projecting an even worse decline for the basin,” the Seaport analysts wrote.

In the Illinois Basin, Alliance Resource Partners and Peabody Energy announced cuts totaling 4 million st combined on an annualized basis.

According to Levin and Martin, “we think the Illinois Basin may have to shed another ~10MM tons of production if 2020 just to help balance the market.”

They “think the possibility that [Contura] may have to reclaim its two previously owned PRB assets is picking up steam, in large part due to objections from the federal government.”

According to the report, the federal government apparently wants all or some portion of the $60 million of royalties/taxes it is owed before Contura can get the lease necessary to mine coal at its previously-owned PRB mines.

Another potential problem, Levin and Martin wrote, is that the federal government has rules requiring producers to produce all of the coal under the lease agreement or pay minimums instead.

“We suspect the company is still negotiating, so there is still some hope an agreement can be reached,” they added. “However, if there is no resolution to these issues quickly (and time is running short), we expect [Contura] to move directly into the reclamation phase.”

According to the report, Peabody and Arch have received a second request from the Federal Trade Commission.

“This isn’t a surprise,” Levin and Martin wrote. “In fact, it was expected. The issue of what constitutes the market is a complex and muddy one fraught with compelling arguments for both sides.”

“For every five experts who believe the JV will pass anti-trust muster, an equal number seem to have their doubts,” they continued, adding that Seaport does not believe the outcome has to be binary.

Seaport puts the probability of the JV receiving approval above 50/50, they wrote, although the length of the process is debatable.

Regarding the effects of the JV if approved, Martin and Levin wrote they do not believe declining demand for PRB will be stopped “because the basin will likely continue to struggle with structural issues like low natural gas prices, increased renewables generation and a rapidly aging coal fleet.”
Source: Platts

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