Powder River Basin coal production in the first quarter fell 13.4% compared to the prior quarter, and production in the 12-month period that ended with the quarter was down 8.7% year over year, an S&P Global Market Intelligence analysis found.

The region is the largest source of coal by volume in the U.S. and is heavily dependent on domestic power demand, which has been in a structural decline exacerbated by the recent COVID-19 pandemic. The region's mines produced just 62.6 million tons in the first quarter of 2020, down from 72.3 million tons in the fourth quarter of 2019 and 70.4 million tons in the first quarter of 2019.

"Consolidation in the [Powder River Basin] is sorely needed as demand has continued to decline more quickly than supply has come offline, and COVID-19 has the potential to accelerate demand declines," B. Riley FBR analyst Lucas Pipes wrote in an April 17 note to investors. Pipes estimated that annualized supply from the basin exceeds demand by about 51 million tons, as demand declines have outpaced supply cuts.

The two largest producers in the region, Arch Coal Inc. and Peabody Energy Corp., are trying to make that consolidation happen by combining their western operations, including the Powder River Basin, under a joint venture. Both producers insist the move would help the coal industry better compete with gas and renewable energy resources, but the Federal Trade Commission has opposed the proposal due to anti-competition concerns. Together, the mines produced 60.1% of the coal in the region in the first quarter.

"We remain confident that the business combination will prove beneficial to all stakeholders, including our customers, employees and shareholders by creating a long-term, efficient, stable and cost-competitive supply platform in an increasingly difficult energy marketplace," Arch CEO Paul Lang said on a recent earnings call. "We respectfully disagree with the FTC's position and, along with Peabody, will be vigorously defending the transaction."

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The two companies operate the largest coal mines in the region. Peabody decreased coal production at the massive North Antelope Rochelle mine from 21.4 million tons in the fourth quarter of 2019 to 17.5 million tons in the recent quarter. Production at Arch's largest mine, Black Thunder, dipped from 17.6 million tons to 13.7 million tons over the same period.

Peabody's Caballo mine reported relatively flat production quarter over quarter, while its smaller Rawhide mine decreased output by about 9.7%. Production at Arch's Coal Creek mine fell by about 7.0% quarter over quarter.

Benjamin Nelson, the lead coal analyst at Moody's Investors Service, warned in a February note to investors that the Powder River Basin would likely see coal mine closures in the early to mid-2020s. However, Nelson also noted that relatively new entrants into the region would delay mine closures and depress profitability.

Eagle Specialty Materials LLC recently acquired the Belle Ayr and Eagle Butte mines in the region. In just the last four years, the mines have changed ownership from Alpha Natural Resources, Inc. to Contura Energy Inc. and then from Contura to Blackjewel LLC, which recently sold the mines to Eagle Specialty during its bankruptcy restructuring. The Navajo Nation company Navajo Transitional Energy Co. LLC acquired the Antelope, Cordero Rojo and Spring Creek mines from Cloud Peak Energy Inc. in a bankruptcy sale.

The Eagle Specialty and Navajo Transitional mines produced an aggregate 16.8 million tons of coal in the first quarter, or roughly 26.9% of the coal mined in the region. Together, the two new companies to the basin produced 15.8 million tons in the fourth quarter of 2019. The relatively large Buckskin mine owned by Peter Kiewit Son's Inc. sharply reduced production from 4.3 million tons in the fourth quarter of 2019 to 2.8 million tons in the recent quarter.

Lower coal prices in the eastern U.S., in part due to a drop in seaborne demand, has made it tough for Powder River Basin operations to move tons into more distant markets.

"Much of the coal produced in the [Powder River Basin] ships to other regions of the country, where customers value some combination of the product's low cost and its low sulfur content," Nelson wrote. "But coal prices have fallen significantly in the Eastern US coal basins, with a weak export market indirectly flooding the domestic market."