Industry Trend Analysis - Steep Cuts In 2016 Before Hints Of Relief - JUNE 2016

BMI View: US coal miners will continue to rein in output and lay off workers to withstand the weak coal price environment over the next few quarters. The Powder River Basin and Illinois Basin will remain relatively resilient than the Appalachian Basin, due to lower operating costs.

The US coal industry will continue to consolidate, as persistently weak thermal and metallurgical coal prices and tightening environmental regulations force firms to shed non-core assets, mothball mines, streamline operations, seek bankruptcy protection and narrow operational strategies. Additionally, significant coal stockpiles and competitively cheap natural gas will weigh on domestic demand, keeping the market well-supplied and contributing to weak coal prices over the coming quarters. As such, we revised down our coal production contraction forecast for 2016, from 12.0% to 20.0%. We now forecast US coal output to fall from 562mnt in 2016 to 589mnt by 2020, averaging an annual decline of 6.0%.

Our subdued growth forecast is supported by high-frequency data from the US Energy Information Administration (EIA). As of May 14 2016, the EIA reported a 32.8% decline in year-to-date coal production, totalling only 212 million tonnes (mnt) compared to 315mnt over the same period in 2015. In the top coal producing states, output continues to decline at an accelerating pace. According to the EIA, as of May 14 2016, over the first four and half months of 2016, Wyoming, the largest US coal producing state, saw coal output plummet by 30.8% y-o-y, following an annual decline of only 5.0% in 2015. Meanwhile, West Virginia, the mainstay of Appalachian coal and second largest producing state, posted a steep YTD drop of 36.9%, following an annual contraction of 14.9% in 2015.

Free Fall Not Over Yet
Select States - Coal Mine Production Growth (% y-o-y)
YTD = year-to-date as of May 14, 2016. Source: EIA, BMI

Slimming Down To Withstand Tough Market Conditions

Central and western US coal producing states will maintain domestic market share, supported by low operating costs and modest project pipelines over a multi-year horizon. For instance, in 2015, coal cash costs averaged USD25.2/tonne and USD30.4/tonne in the Powder River Basin and Illinois Basin, respectively, compared to USD39.7/tonne in Appalachia. As such, the slimmed-down industry will prioritise low-cost, large-scale mines with significant reserves in the Powder River Basin (Wyoming and Montana) and the Illinois Basin (Illinois, Western Kentucky and Indiana). For instance, in March and April 2016, bankrupt coal miners Peabody Energy, Arch Coal and Alpha Natural Resources laid off 235, 230 and 37 employees, respectively, at Powder River Basin coal mines to maintain profitability at key mines.

Wyoming To Remain Top Producer
US - Coal Mine Production By State (%), 2015
Source: EIA, BMI

Limited Light At The End Of The Tunnel

While we do not forecast US coal production growth to recover by 2020, low-cost producers in the aforementioned states will experience some relief by 2017, as rising natural gas prices return some domestic demand for cheaper thermal coal. We forecast thermal coal prices to remain subdued, edging only slightly higher to USD54.0/tonne in 2020 from USD51.0/tonne in 2016. Prices will remain capped due to an oversupplied global market and the shift away from thermal coal in electricity generation. Nonetheless, a modest recovery in natural gas prices, which we forecast to increase from USD2.3/mn BTU in 2016 to USD3.4/mn BTU by 2020, will help rebalance the domestic market.

Some Relief From Rising Natural Gas Prices
Select Commodities - Price Change (% y-o-y)
f = BMI forecast. Source: BMI Calculation