Powder River basin (PRB) coal market participants are bracing for an uncertain start to 2023, following a period of unusual volatility in the thermal coal markets in recent months.
This year has been marked by rail delivery delays and other supply constraints that at times had PRB coal consumption at power plants outstripping deliveries. While the railroads vow to improve rail service next year, PRB coal producers find themselves contending with possible lackluster demand in 2023, as utilities retire coal-fired power units.
The rail service woes hampered utilities' efforts to replenish coal inventories, helping push prices early in 2022 near the record highs set in November 2021. Rail service continues to be an issue for many customers, despite improvements in train speeds, prompting some utilities to defer shipments until next year.
Generators responded to the supply constraints by implementing conservation measures. And by the end of September, power plants had more PRB coal on hand now than they did a year earlier. Plants held 46.6mn short tons (42.3mn metric tonnes) of sub-bituminous coal in inventory, the equivalent of 95 days of consumption, according to US Energy Information Administration (EIA) estimates. A year earlier, generators had 83 days of subbituminous coal supply stockpiled.
The railroads say they expect service to continue to improve next year. Western railroad BNSF looks to speed up rail cycle times and move more coal in 2023 than it has this year, general director of coal marketing Matthew White said earlier this month. But some utility buyers say they would rather not make new purchases if they unsure supply will be delivered.
PRB production grew at a moderate pace this year, EIA estimates show. And mine closings halted. Producers have lowered their 2022 production projections because of the transportation constraints, and they are very cautious about their 2023 output targets.
That's because the basin stands on shakier ground than it did 12 months ago, as more power plants retire.
Generators closed nine sub-bituminous coal plant units between January and the end of September that had a combined net summer capacity of 2,761MW and had plans to shut seven more, with another 2,130MW of capacity, by the end of this year, according to EIA. Another seven sub-bituminous coal units with a combined 1,323MW of capacity are expected to close next year.
EIA expects coal-fired generation in the PRB's main customer bases — Midcontinent Independent System Operator (MISO), the Southwest Power Pool and the Electric Reliability Council of Texas — to fall by 6.6pc in 2023 to a combined 375.5bn kWh amid lower natural gas prices and the continued coal-fired power plant retirements.
Last month, day-ahead natural gas prices at some power hubs were above where they had been a year earlier, and prompt quarter PRB was less than half the record $33/st it had been in November 2021, averaging $15.38/st.
But the prompt quarter PRB assessment was still 29pc above the five-year average for November, and gas-fired dispatch continued to hold a competitive advantage over coal in MISO. The day-ahead spark spread for 8,000 Btu/kWh natural gas units at the Indiana power hub averaged $24.151/MWh, while the margin for 10,000 Btu/kWh coal units averaged -$16.691/MWh. A year earlier, the gas spark spread averaged $27.855/MWh and coal was $19.976/MWh.
Year-ahead spark spreads indicate natural gas will remain profitable over coal in 2023 as well.
Coal prices could fall now that supply is more readily available, some market participants said. But prices next year could hover near current levels, if inflationary pressures drive up production costs.
Coal companies will take those signals into consideration, as they strive to optimize existing assets and return more money to shareholders next year. Producer Arch Resources expects to continue selling thermal coal from its PRB mines. But Arch already has said it intends to exit the segment as soon as its PRB thermal coal no longer contributes to the company's profitability.
