The profitability of North American coal miners is set to worsen in the next 12 to 18 months on the back of an expected decrease in export prices for thermal coal, particularly in Europe, combined with mostly open contract positions for some producers in 2020, says Moody’s Investor Service.
Stronger conditions in the export market over the past couple of years have helped to prop up prices and allow many North American producers to stay in business and generate meaningful cash flow.
But as the export market weakened, the outlook for coal miners have now turned negative with more tons to return to the domestic market, pushing prices lower, Moody’s says in its North America coal outlook research note, published on Wednesday.
The long-term demand prospects for the North American thermal coal industry are weak, with pressure mounting on utilities to switch to natural gas and renewable energy.
Coal-fired power plants in the US is under significant economic pressure. Between 2010 and the first quarter of 2019, US power companies announced the retirement of more than 546 coal—fired power units, totalling about 102 GW of generating capacity. Plant owners intend to retire another 17 GW of coal-fired capacity by 2025, according to the US Energy Information Administration.
In a reduced demand environment, smaller, higher cost mines are uneconomic and vulnerable to retirement of specific coal-fired power plants.
Moody’s states that rated producers are well contracted through 2019, but that many have substantial open positions beyond that and only a few, such as Consol Energy, have contracted the vast majority of their volumes for 2020. Consol, Foresight Energy, Murray Energy and Wolverine Fuels are concentrated in domestic thermal coal, while producers such as Peabody Energy are more diverse and also produce metallurgical coal.
For metallurgical coal, used in the steelmaking industry, the outlook is more favourable, despite a temporary price weakness attributed to the impact of escalating trade tensions.
Moody’s says pricing for metallurgical coal remains at levels that will support “reasonable” earnings for producers, although it will be lower than figures for 2017.
“Over the longer horizon, we remain concerned that demand for metallurgical coal could tip into secular decline as the steel industry continues to shift towards electric arc furnaces, which recycle scrap steel, rather than basic oxygen furnaces, which make steel from pig iron from a blast furnace, which uses raw materials, including metallurgical coal.”
Source: Mining Weekly |
