Export demand for seaborne coal continued into September, keeping upward pressure on high-quality bituminous coal prices. The August rally in domestic steam coal tapered on seasonally lower demand, but prices held steady overall. September pricing reflects the ongoing split between domestic and export thermal coal, with mostly bituminous export prices continuing to gain as subbituminous prices lag against low domestic demand.
Physical CAPP 12,500 Btu/lb benchmarks increased $1.10/ton, or 1.5%, while NYMEX CAPP was flat for the month. NAPP Pittsburgh Seam 13,000 Btu/lb gained $1.75/ton, or 3.1%, extending its price rally to three months. The NYMEX PRB benchmark eased 5 cents/ton, or 0.6%.
After hovering mostly below $3/MMBtu most of the summer, natural gas prices rallied in September to close above the $3 mark. High summer demand and low storage levels more than offset record levels of natural gas supply, providing price support. Henry Hub spot prices opened the month at $2.98/MMBtu and surged midmonth to a high of $3.11/MMBtu, before easing to close the month at $3.10/MMBtu. The natural gas storage deficit grew slightly during September as injections more closely matched historic averages. The storage deficit as of Sept. 21 stood at 620 Bcf, up from 588 Bcf the third week of August. This raises the prospect that storage levels will be significantly lower than usual going into fall, which may have been reflected in higher spot prices the second half of September.
Most regional spot natural gas market remain well below $3/MMBtu. As natural gas production expands its reach beyond the Marcellus and Permian shales, most of the country's natural gas spot markets have priced at a discount to Henry Hub. These discounts widened during the September shoulder season, with Chicago 19 cents below Henry Hub, Marcellus points 29 cents below, and TETCO M3 60 cents below. Delivery constraints eased in the West during September, with SoCal Border gas pricing 90 cents below Henry Hub. S&P Global Market intelligence expects that the persistence of discounted natural gas from shale oil and shale gas regions will put significant pressure on domestic coal demand and restrain coal price growth over the next three years.
Coal inventories shrank in July with summer demand, with the U.S. Energy Information Administration estimating stockpiles at 110 million tons. Taking into account reduced burn and coal retirements, S&P Global Market Intelligence estimates normal year end stockpiles at 137 million tons, with building of inventories likely to occur over the next five to six months.
The chart below shows the current price forecast for the PRB 8800 and 8400 markers.
Pricing for the Powder River Basin is expected to be driven by domestic demand dynamics, with coal retirements and competitive natural gas restraining demand and prices. Declines in natural gas pricing mentioned above have already pressured near-term pricing and volumes. Looking ahead, flat pricing is expected as higher demand from export markets is more than offset by these domestic factors. While long-haul PRB is resilient to gas generation priced from $2.85/MMBtu to $3.00/MMBtu, the current strip for natural gas and associated regional prices trends lower through 2019, potentially eroding coal demand. Combined with retirements of Midwest PRB-burning plants, this creates surplus capacity in the PRB, tending to reinforce current price levels over the next few years.
With stockpiles now at normal levels for the year, bituminous markets increasingly rely on firm seaborne markets to sustain demand into 2019. Year-over-year export volumes have held strong, allowing prices for export-ready coal and metallurgical coal complements to remain strong into fall.
The above chart forecasts flat pricing across all bituminous coal types, as pricing pressure from natural gas builds into 2019, with modest price growth thereafter as natural gas prices trend back up. As with the PRB, ongoing low natural gas prices creates a ceiling for coal prices, tending to drive steam coal prices down. S&P Global Market Intelligence projects that the combination of natural gas prices and coal retirements will pressure generation demand through 2021, with overall demand falling by 225 million tons from 2017-2022.
Coal production and demand
For the four weeks ending Sept. 22, coal shipments averaged 14.9 million tons, with support coming from summertime demand into the first week of September and exports. For the third quarter, weekly shipments are 6% lower than for the same period in 2017.
The chart below compares the current production forecast with recent history. Electric sector demand is projected to decline from 675 million tons in 2017 to 601 million tons in 2018, and to come under further pressure starting in 2019. A surge in announced coal retirements over the next four years combined with lower natural gas prices is projected to push coal generation demand to a low point of 450 million tons per year by 2022. Last year's boost in demand appears temporary, with the overall coal market (domestic demand and exports) projected to decline by 227 million tons from 2017-2022.
Production outlook — Powder River Basin
Production constraints that hampered volumes during the second quarter were largely resolved in time for the summer peak demand season. Mines were able to make up some of the backlogged tonnage, with total PRB production (Northern and Southern) now projected at 327 million tons for 2018. While no additional coal plants are scheduled to retire until the end of 2018, retirement of coal generation in the Midwest and Texas, along with lower natural gas prices, is projected to shrink the market through 2022. Modest growth opportunities include displacement of smaller western coal producers, along with further expansion in export markets. Overall, PRB is forecast to reduce production by 13 million tons in 2018, before losing an additional 52 million tons in 2019.
Production outlook — Illinois Basin
As noted above, growing availability of Marcellus/Utica shale natural gas into the Midwest has maintained downward pressure on spot coal prices, and has cut into domestic demand for ILB coal. This demand pressure has been offset by export volumes, keeping overall production levels stable. S&P Global Market Intelligence forecasts 2018 ILB production at 108 million tons, nearly 5% higher than 2017. Export markets are helping to drive this modest growth. As in other coal regions, natural gas prices are expected to move further downward by 2019, with shale gas deliverability into the Midwest driving Illinois Basin coal volumes down. With low natural gas prices persisting beyond 2018, Illinois Basin production is projected fall below 100 million tons per year, and remain relatively flat thereafter.
Production outlook — Appalachian basins
Appalachian basin coal production has increasingly shifted to metallurgical and export steam markets, with long-haul thermal domestic markets continuing to erode. Strong seaborne thermal coal pricing drove production momentum during the second quarter, bringing overall production in line with 2017. Going into the third quarter, there are no scheduled coal retirements and displacement by natural gas is already maximized. S&P Global Market Intelligence projects total production at 204 million tons, a 2.5% increase over 2017. Exports of thermal and metallurgical coal ease slightly in 2019 which, combined with retiring coal generation is expected to reduce production by 28 million tons.
Coal forecast methodology overview
Market-indicative coal forecasts produced by S&P Global Market Intelligence represent forward curves for spot-traded instruments, analogous to a strip of contracts, with the shorter tenors (current year, prompt year, plus additional years if available) driven by the observed/assessed market and the longer tenors (typically years 3-20 for physically assessed markers and NYMEX futures) driven by fundamental estimates of cash costs of production, accepted returns to capital, regional productive capacity, and forecast supply and demand. For the long-tenored portion of the curve, S&P Global Market Intelligence forecasts prices for specific coal markers, and defines the remaining markers via historical spreads.