US thermal coal demand likely will continue to outpace supply in 2022, but the imbalance is not expected to be as drastic as it was this year.
In the first 10 months of 2021, US coal consumption exceeded coal receipts by more than 55mn short tons (50mn metric tonnes), federal government data show, as producers could not keep up with demand and utilities drew heavily from inventories. At the same time, rising prices and international demand drew US thermal coal into seaborne markets.
By the end of October, US power plants held 85mn st of coal in inventory, an "extremely low historical level," the US Energy Information Administration (EIA) said. Stockpiles at mines and distribution facilities had dwindled to an estimated 23mn st at the end of September, according to EIA, and producers have suggested mine inventories have remained relatively low.
Conditions will not be as tight in 2022. Some producers have reported recent success in hiring miners and are expecting to have greater output next year. In addition, coal consumption and exports could decline.
US generators are expected to retire nearly 15GW of coal-fired capacity in 2022, Argus records show. Analysts also are projecting natural gas prices will decline, giving the fuel a bigger competitive edge over coal in the US generation stack.
But steam coal consumption may still outpace production.
One utility recently said it "definitely sees a struggle" obtaining more Appalachian and Illinois basin coal for 2022 delivery because of tight supply.
Producers have said a lack of capital, a tight labor market and uncertainty over coal's medium-term outlook are limiting output gains. Employees on sick leave because of Covid-19 could also continue to affect production.
EIA recently forecast US coal output next year will increase by 38mn st from an estimated 583mn st in 2021, but electric power sector coal stockpiles will continue to decline, to a projected 72mn st at the end of December 2022 from 83mn st at the end of this year.
Rail performance and supply chain delays will be other key issues for the coal market next year. Shippers have complained to US rail regulators in recent months about inadequate service at CSX and Norfolk Southern, and coal buyers have faced restrictions from rail transportation providers over how much coal can be delivered. CSX and NS have said restoring service levels are top priorities.
Weather and natural gas prices will also play their usual key roles in influencing the coal market.
Early signs of easing
This year's coal supply shortage arose when a perfect storm of conditions that had weighed on the market in previous years reversed. Coal burn started climbing from year-earlier levels in December 2020 amid a quick recovery in electricity demand and rising gas prices. Steam coal exports also started to rise from year-earlier levels at the end of 2020.
And coal companies, which had slashed output in 2018-2020, could not keep pace with rising demand.
But these conditions have started to show signs of easing.
Electric power coal consumption has recently slowed, with milder weather and some generators trying to conserve their now lower-than-normal coal stocks. In November, all three of the major US electric power grids, as well as the Electric Reliability Council of Texas, had year-on-year decreases in coal-fired generation, even as total electricity demand inched higher.
Natural gas prices also have fallen. That, as well as multi-year high coal prices, has given gas a greater competitive advantage over coal in most power markets and could continue to be a factor in 2022.
The day-ahead Henry Hub gas price has averaged $4.80/mmBtu this quarter through 27 December amid tight supplies. EIA forecast the price will average $4.58/mmBtu in the first three months of 2022 as rising LNG exports and flat production keep inventories below the five-year-average. Prices will then generally continue to decline as production increases and LNG export growth slows, the agency said.
But not everyone agrees that gas supplies could remain tight through the first half of 2022. While lags in early storage injections drove some gas prices above $6/mmBtu in October, storage has since rebounded toward more normal end-of-season levels, said Matt Hagerty, a senior energy analyst with BTU Analytics. That could suppress gas prices and weigh on coal-fired generation later next year.
