Industry Trend Analysis - Coal Outlook Still Grim Despite Executive Order - MAY 2017

BMI View: President Trump ' s energy-focused executive order will have a minimal impact on the coal mining industry, as a subdued coal price outlook and state and local opposition keep f ull recovery at bay.

On March 28, US President Donald Trump signed an executive order mandating the elimination or review of environmental regulations deemed to pose a hurdle to energy production, economic growth and job creation, including the Clean Power Plan (CPP). As we previously identified the implementation of the CPP unlikely due to legal uncertainty, Trump's executive order does not change our negative outlook on US coal production over the coming years ( see '2016 Presidential Election: Downbeat Mining Outlook Regardless Of Outcome', August 22 2016). Our Power Team maintains the core view for natural gas-fired power capacity to continue as the main driver of the expansion of the US conventional power sector over the coming years, due to the availability of cheap feedstock ( see 'Energy Executive Order Will Not Derail US From Gas And Renewables', March 30). As such, the US coal market will remain well-supplied, keeping prices low and weighing on miners' profit margins. For instance, at the end of 2016, US coal stocks totalled 187 million tonnes (mnt), down slightly from 216mnt in 2015, although still elevated by historical standards. We forecast thermal coal prices to average USD70.0/tonne in 2017 and trend lower thereafter to average USD66.0/tonne over 2018-2021.

Moreover, state-level opposition to coal mining will see environmental regulation in certain jurisdictions to continue to tighten despite the move away from this trend at the federal level. While some coal producing states such as Pennsylvania and Indiana remain unlikely to pass legislation that will raise costs for an important source of revenue, others will ramp up efforts to counteract federal deregulation. For instance, in 2016, New Mexico required Peabody Energy to reduce the level of self-bonding commitments before filing for bankruptcy, effectively holding the company more accountable for land reclamation costs after mines close. The self-bonding practice allows firms to operate without setting aside funds for land cleanup, rather enabling firms to demonstrate their ability to pay later based on cash flow. Colorado is moving towards eliminating self-bonding entirely as an option for coal miners. According to an official from the Department of Environmental Quality, Wyoming, the largest coal producing state, will revaluate rules regarding self-bonding and other land quality programmes over 2017-2018, which may result in more stringent requirements for self-bonding. In March, a Native American tribe in Montana and a number of conservation groups sued the Trump administration for reversing the ban on coal leases on federal land, citing the lack of consultation with the former and insufficient environmental review.

Long-Term Decline Intact
US - Coal Production (mnt) & Growth (% y-o-y)
f = BMI forecast. Source: BMI, Energy Information Administration

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