The Appalachian thermal coal market may still be oversupplied at least into early next year, despite producers' efforts throughout 2020 to slash output in response to falling demand.
Another 15mn-25mn short tons (14mn-23mn metric tonnes) of thermal coal output may need to be taken off line to balance the market, one seller said.
But a number of analysts look for Appalachian thermal coal production in 2021 to surpass this year's levels on expectations of rising natural gas prices and a partial recovery in electricity demand.
The US Energy Information Administration (EIA) projects Appalachian thermal and metallurgical coal production will reach nearly 167mn st next year. That would be a nearly 20pc increase from EIA's anticipated output of 139.4mn st this year. If EIA's projection proves correct, 2020 output will be down by nearly 28pc from last year's output of 193mn st.
A perfect storm of conditions weighed on the Appalachian thermal coal market in 2020. First, the sustained lower cost of natural gas and a warmer-than-usual winter caused demand to plummet and power plants' coal inventories to climb. Coal-fired generation in the PJM Interconnection fell by 35pc to an average of 415,822 MW/d from December 2019-March 2020 when compared with a year earlier.
The Covid-19 pandemic then sparked a global economic slowdown, which reduced global economic activity and lowered natural gas prices even further. Large Appalachian coal producers Consol Energy and Contura Energy temporarily closed mines.
Appalachian coal production for April-June plunged by 45pc from a year earlier, according to US Mine Safety and Health Administration data. Central and Northern Appalachian coal prices tumbled, and export opportunities evaporated.
At least one mid-sized Appalachian coal producer, Rhino Resource Partners, filed for Chapter 11 bankruptcy amid the downturn, and Contura Energy began accelerating its plan to exit the thermal coal market. Rhino is now seeking approval of its Chapter 11 liquidation plan after selling most of its assets, and Contura recently completed the sale of its Cumberland mine in Pennsylvania, a move that dramatically reduces its thermal coal output.
Coal demand in Northern Appalachia recovered more quickly than in Central Appalachia. Third quarter production in Northern Appalachia fell by 21pc from a year earlier while Central Appalachia's output dropped by 40pc.
Similarly, Central Appalachian coal deliveries to US utility-scale power plants from January-September dropped by 39pc from a year earlier to 9mn st. Shipments from southern West Virginia, the biggest supplier of Central Appalachian thermal coal, declined by 43pc to 4.7mn st. Coal receipts from Northern Appalachia decreased by 32pc to 41mn st during the same period. But while the steep year-on-year decline in receipts continued in the third quarter for Central Appalachian coal, deliveries from northern West Virginia were nearly flat, and shipments from Pennsylvania fell by only 15pc.
The coal market began to rebound in the third quarter, a trend that continued into December.
"Some companies are drawing down inventories, maybe running coal plants a little bit harder," EIA senior electricity expert Mark Morey said.
But a lot of uncertainty still persists in the market, as natural gas prices remain competitive, and the Covid-19 pandemic has led to utilities making conservative purchases of Appalachian coal. Spot purchases remain sparse as well.
Market participants have reported a renewed interest in exports amid rising International coal prices, but they are unsure if they will be sustained. One producer said that export demand can be hard to predict, as "international markets have so many different levers." And unless exports rebound, more production cuts are needed in Appalachia, the producer said.
EIA, in its latest Short-Term Energy Outlook, forecasts US thermal coal exports climbing year-over-year by only 4pc in 2021 to 24mn st.
"Sometimes the export market can turn much faster, and shift quicker than domestic markets," Morey said.
EIA continues to forecast growth in coal demand in Asia-Pacific. But the question becomes, "Does that help rebound US coal," Morey asked. "The answer is maybe, slightly."
