Industry Trend Analysis - Growth To Endure, Despite Significant Headwinds - NOV 2015

BMI View: Illinois' coal production will be supported by strong, albeit declining domestic demand and the states' advantageous high coal sulphur content. Despite this, weak prices and increasingly stringent environmental regulations will continue to present headwinds for the sector as a whole.

Illinois coal sector will diverge from the broader US decline in coal output, as the region's high sulphur content, vast reserves and low cost miners continue to increase output. Despite this, firms will continue to consolidate and cut jobs to remain profitable. Illinois basin coal's greater sulphur content makes it preferable to power plants that installed scrubbers to remove contaminants, after stricter federal laws over emissions from the Environmental Protection Agency (EPA) passed in 2014 ( see: 'Clean Power Plan: Another Nail In The Coffin, August 6 2015). Further, the state's coal production, while only accounting for about 5.3% of total US coal output in 2013, will be bolstered by declining yet substantial domestic demand. We forecast US thermal coal to account for 36.3% of total electricity generated in 2015, decreasing slightly to 33.7% by 2019.

The coal industry in the Illinois basin (which includes areas in Indiana and Kentucky as well as the southern portion of Illinois) will increase production over the next few years in response to growing demand for the region's high sulphur content coal. Although increasingly stricter EPA regulations will continue to drive up costs for the industry as whole, Illinois' inexpensive coal will offer the sector a strategic advantage. US coal-fired power plants have invested USD30bn between 2007 and 2011 on expensive flue gas desulphurisation systems (scrubbers) to comply with the stricter sulphur dioxide emission limits, which then make high sulphur - 'dirtier' and cheaper - coal more cost effective. Demand for Illinois' coal will steadily rise, spurring production, as US coal-fired plants continue to either shut down or integrate scrubbers. For instance, Illinois miner Foresight Energy reported 3.3% y-o-y growth in produced tons, from 4.9 million tonnes (mnt) in Q314 to 5.1mnt in Q315. Weekly data from the US Energy Information Administration reveals Illinois as one of the few states to experience y-o-y coal production growth, averaging a 10.3% increase in the 52 weeks ending with September 25 2015, and having produced 54.6 thousand tonnes (kt) in that period. In comparison, Wyoming, the top US coal producing state, experienced a 2.4% y-o-y decline over the same period.

Coal To Remain Major Electricity Source
US - Select Power Sources, % of Total Electricty Generation
f= BMI forecast. Source: National Sources, BMI

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