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Regional Report – USA: the aging king

Published by
World Coal,

Ben Kutler, BMI Research, USA.

BMI Research forecasts the US will remain the second largest consumer and producer of coal globally through to 2020, but there will be challenges ahead. Over 90% of coal produced and consumed in the US is of the thermal variety, but rising gas-fired electricity generation and increasing regulatory headwinds over the past several years have led to falling demand for domestic thermal coal. Moreover, deteriorating macroeconomic fundamentals in the eurozone, Japan and China will reduce demand growth for electricity generation, while a stronger US dollar will raise the cost of US-sourced thermal coal imports in local currency terms.

Metallurgical coal demand is also being hit by declines in the global steel capacity utilisation rate, owing to weak global steel prices. At the same time as demand fundamentals for both thermal and metallurgical coal remain weak, global seaborne supply of both continues to be ample. Hence, both global thermal and metallurgical coal prices will stay subdued over the coming quarters, increasing the financial strain on US producers. Thermal coal prices in particular are likely to stay subdued in 2015 due to increasing regulatory burdens facing both producers and utilities in the US. These developments and trends lead BMI Research to forecast average annual declines in US coal production of 0.5% in 2015 – 2019, with total production of 886 million t in 2019.

Domestic thermal coal demand to fall

BMI Research forecasts thermal coal will remain an important part of the US energy mix given rising Henry Hub natural gas prices through the decade, its ample coal reserves and significant coal-fired electricity infrastructure. However, these factors will be insufficient to boost thermal coal’s competitiveness, leading to a continued decline of the use of coal in the US energy mix, reducing mining production incentives. The US Energy Information Administration (EIA) reported in 2013 that, while total electricity production in the US rose just 6% over the past decade, electricity derived from natural gas rose 61%, while coal’s share fell 17%. Total electricity generated by coal gained slightly in 2013 and BMI Research estimates it will see further gains in 2014, accounting for slightly over 40% of total electricity generation. However, BMI Research forecasts coal’s share will see annual declines thereafter, falling to approximately 33% in 2023. Still, coal will remain the top source of electricity in the coming years, leading BMI Research to expect that US coal demand will not collapse and that coal will still make up a large portion of baseload capacity in the years to come.

The continued decline in coal usage leads BMI Research to forecast that natural gas-fired electricity generation will surpass coal-fired generation in 2023. Coal-generated electricity will register annual declines over this period, while natural gas-generated electricity will record annual gains. According to latest available data from the EIA, no additions of coal capacity were made in the first six months of 2014. In contrast, there were natural gas capacity additions of 2179 MW over 1H14, an increase of 60% compared to the same period in 2013. Moreover, the introduction of Mercury and Air Toxics Standards (MATS) in 2015/2016, as well as the impending US Environmental Protection Agency (EPA) regulations on carbon emissions from existing power plants, which aim to reduce carbon emissions by 30% compared to 2005 base levels over the next 25 years, will lead to older, dirtier coal-fired power plants being shuttered and will ensure mined coal output does not return to the highs of the previous decade.

Exports unlikely to provide relief

BMI Research does not forecast that foreign demand for US coal will be able to supplant weaker domestic demand and reverse the industry’s decline (in contrast to US coal producers who expect multi-year growth in exports). According to the EIA, metallurgical coal accounted for about two thirds of coal export growth from 2007, while thermal coal accounted for a third. Yet, while exports have risen broadly over the past decade, peaking in 2012, they have declined since. In 2013, exports fell approximately 6.4%, while in 1H14 they declined approximately 16.0% from 1H13.

European demand for US thermal coal had previously increased due to higher natural gas prices and declining local production, but growing European imports from Australia and Indonesia coupled with declining electricity demand in Continental Europe, owing to stagnant economic growth, will put further downward pressure on US exports. Demand for US metallurgical coal from major global steel producers, including China, Japan and Brazil, will decline as all three countries face continued steel overcapacity amid weak domestic demand.

Infrastructure limitations in the Pacific Northwest will also cap total export volumes, while significant local protests are likely to hold up development of new rail and port capacity for years. Producers operating in the PRB will be best positioned to increase exports of both thermal and metallurgical coal to Asia owing to the basin’s coal quality and cost competitiveness. Peabody Energy, which is a major producer of PRB coal, has secured export capacity from three terminals operated by Kinder Morgan in the Gulf of Mexico to avoid bottlenecks in the Pacific Northwest. The deal should enable Peabody to export an estimated 7 million t. However, exporting coal to Asia from the Gulf of Mexico as opposed to the Pacific Northwest will present added costs, though the eventual expansion of the Panama Canal, to be completed in 2016, should mitigate this.

A continued appreciation of the US dollar will also put downward pressure on coal exports, particularly to markets facing currency depreciation relative to the US dollar, including the Eurozone, Brazil and Japan. While lower coal prices would traditionally be expected to boost demand and help rebalance the market, currency depreciation coupled with weak demand fundamentals will largely offset the positive impact on demand of lower prices in US dollar terms.

Potential short-term upside

Though the long-term decline of the US coal industry remains virtually assured, several potential short-term upside risks remain:

  • First, a delay in the implementation of EPA regulations due either to an adverse Supreme Court ruling or to successful efforts by the Republican-controlled Congress to limit the EPA’s authority could sustain some coal demand.
  • Second, insufficient gas pipeline capacity may limit the ability of utilities to acquire sufficient gas supplies.
  • Third, newly announced EPA regulations on coal ash, a byproduct from the burning of coal, were less strict than many environmental groups had been pushing for, reducing (for the time being) additional regulatory burden on the coal industry.


Despite the aforementioned headwinds facing the US coal industry, the sector will still remain a significant source of investment, output and employment within the wider mining sector. After decades of sector growth and with coal still serving as the top source for domestic electricity generation, the sector's decline will occur over a span of decades, not years. Hence, miners with solid balance sheets and quality assets are likely to see growth opportunities in the coming years, particularly as the sector gradually consolidates. Yet over the longer term, as domestic demand wanes due to regulatory and industry trends years in the making, the sector will steadily become a shadow of its former self and contribute less to the overall energy and natural resources sector. Indeed, the king’s reign will come to an end.

Written by Ben Kutler. Edited by . This is an extract of an article that first appeared in the April 2015 issue of World Coal.

About the author: Ben Kutler is Commodities Analyst at BMI Research. This is an extract of an article that first appeared in the April 2015 issue of World Coal.

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