Central Applachian steam coal market may tighten

Central Appalachian thermal coal buyers could face a shortage of the fuel as production continues to fall.

Some sellers and buyers say they foresee demand potentially outpacing supply despite the basin's shrinking customer base. Producers are struggling to stay afloat, they said, and no substantial reductions in coal-fired capacity are expected over the next few years.

Central Appalachian mines produced 48.6mn short tons (44mn t) of coal last year, US Mine Safety and Health Administration (MSHA) data show. That was the lowest since at least 2001.

It is unclear exactly how much of last year's Central Appalachian coal output was thermal, but domestic utility-scale facilities took a little over 12mn st of Central Appalachian coal in 2020 and steam coal exports out of Hampton Roads, Virginia — the primary exit point for Central Appalachian exports — totaled 3.5mn st, US Energy Information Administration (EIA) fuel receipts and Census Bureau data show. Both figures were down from averages for the previous five years.

While some of the drop in Central Appalachian steam coal shipments last year was a result of the Covid-19 pandemic, basin producers have also generally moved away thermal coal. Alpha Metallurgical Resources, formerly known as Contura Energy, said last year it expects to be a full-fledged coking coal producer by the end of 2022 and Arch Coal rebranded itself as Arch Resources to reflect its shift to the metallurgical market.

Coal producers in the basin appear to be holding back on new projects, and a lack of cash flow is preventing them from replacing or repairing new equipment, sources said. In addition, the number of Central Appalachian mines that produced coal has shrunk over the past six years, to 260 from 400, according to MSHA data.

"I see a shortage, for sure. No one is putting money to invest in these operations," a Central Appalachian coal producer said.

Low coal prices also are "not helping," another seller said.

Producers say Central Appalachian thermal coal prices need to be above $60/st to turn a profit, and they have not surpassed that mark in over two years despite steady gains since reaching multi-year lows in June 2020. Argus assessed prompt quarter CSX coal with 12,500 Btu/lb at $56.30/st last week. A year earlier, it was $35.70/st.

Coal-fired unit retirements and fuel switching are expected to slow over the next few years. But the relief to Central Appalachian coal shipments may be temporary.

At least 15 more power plants that use Central Appalachian coal may close through 2035, with the bulk of projected retirements occurring between 2027-34. Only two of the 15 plants are scheduled to close within the next couple of years.

One of the major Central Appalachian coal buyers said it is reviewing how the decline in production could affect its generation system. But no decisions have been made, the utility said.

Other market participants are not so sure there will be a supply shortage. An Appalachian coal trader noted that most generators can burn higher sulfur coal as a fallback.

A number of power plants blend Central Appalachian coal with lower-priced Northern Appalachian or Illinois basin coal. And a few have switched solely to coal from other basins. Georgia Power's Bowen coal plant, for example, burned almost 1.5mn st of Central Appalachian coal in 2015, EIA data show. But it now primarily uses Illinois basin coal. The plant is capable of consuming coal from either basin, and no modifications were needed to switch between the coals.

Similarly, Dominion Energy's Chesterfield power plant in Virginia has stopped burning Central Appalachian coal and uses Northern Appalachian coal instead.

Dominion's Cope, Wateree and Williams plants in South Carolina are one of the few that still only use Central Appalachian coal, according to EIA data. The three facilities took about 1.4mn st of coal from southern West Virginia and eastern Kentucky last year.

Dominion said it is not currently concerned about a shortage. Overall Central Appalachian coal production for domestic utility demand is "likely sufficient based on existing generation sourcing" from the basin, the utility said.

Utility Duke Energy did not express concern either, citing its fuel flexibility programs, which allow its plants in North Carolina to burn different quantities of coal from other regions.

"This has proven to be successful and effective in preparing us for a prudent and dynamic fuel procurement strategy for the future," the company said.

Duke's six generating stations in North Carolina, which took 3.6mn st of Central Appalachian coal in 2020, have differing degrees of fuel flexibilities and capabilities. Each station requires varying amounts of Central Appalachian coals, ranging from 0-50pc, in the blending scenarios for optimal operating conditions, Duke said.

The utility has also upgraded units at three of the stations to burn natural gas in addition to coal.

Alpha's planned exit from Central Appalachian steam coal could present an opportunity for other producers to secure additional business, but they may lack the ability to scale up production.

"It is hard to invest in anything long term when you have no commitment from utilities and no investment from banks," a market participant said. "There is not much light at the end of the tunnel for Central Appalachian coal producers."

By Nick Georgiou