US utility coal inventories are trending upward this year as utility coal demand drops due to competition from cheap natural gas, renewables and continued coal-fired power-plant retirements, Seaport Global wrote in a report published Tuesday.
"Utility inventories are heading in the wrong direction," the Seaport's senior analyst Mark Levin and senior associate analyst Nathan Martin wrote, noting September inventories of 111 million st, up 11% year on year. "This build would've been worse if not for production cutbacks," they added.
Compared with 56 days of burn in September 2018, this September US utility supply totaled 70 days of burn.
While "utilities have varying definitions of what they deem 'normal,' [it's] fair to say 70 days is too high for most everyone, even if we adjust for seasonality," Levin and Martin said.
The US thermal coal market continues to struggle "mightily" under the weight of low natural gas prices and overall week electric generation, Seaport said.
Coal produced 24% of power for the second consecutive month in September as natural gas averaged $2.51/MMBtu in September and $2.17/MMBtu in August. In October, gas prices averaged $2.34/MMBtu, while coal inventories built an estimated 5 million st.
Through November, gas prices dropped 13%, averaging $2.63/MMBtu, leading Seaport to expect another 3 million st build and for US coal inventories to total 117 million st by the end of the year, compared with 103 million st at the end of 2018.
"As for prices, they continue to reflect the combination of weak burn (year to date coal consumption = down 13%) and crummy exports (down 27% through September)," the report said.
While Powder River Basin prices have been largely flat throughout 2019, Northern Appalachian and Illinois Basin prices have dropped 25% and 20%, respectively, for full-year 2020.
"As we look ahead to the new year, we think the best hope for the US thermal market is an unexpected surge in natural gas prices on the back of a cold and long winter," Seaport said, adding that "we say 'unexpected' because recent forecasts are indicating Mother Nature will be of little help in December."
Seaport estimated coal demand will be down 12% in 2019 and fall another 5% in 2020.
Through September, US utility coal demand is annualizing to 559 million st, compared with 637 million st in 2018. "If the final three months play out as expected, US utility coal demand will fall 12%, the worst annual decline since 2015, when it fell 13%," Seaport said.
According to Seaport, the biggest hope for coal demand is a major move in gas prices. Every 1% increase in coal market share equates to 20 million mt-25 million mt of incremental demand. On average, every 25 cents of gas price increases represents that 1% share for coal.News Source: S&P Global