The US coal industry has undergone a dramatic transformation and downsizing during the last two years, especially in eastern states, but no major market has been as affected as the Central Appalachian barge coal market.
Only a few players remain in the emaciated CAPP barge marketplace, which sources said could give a pricing edge to producers.
One long-time trader told S&P Global Platts that in its heyday roughly a decade ago, 20 million st of NYMEX-quality barge coal (12,000 Btu/lb, 1.67 lb SO2/MMBtu, 1% sulfur) was shipped on the Big Sandy River, but this year that volume will be below 1 million st.
The Big Sandy River traverses parts of West Virginia and Kentucky.
"The buyers aren't there, the demand isn't there anymore, so the production isn't there," the trader said. "That barge market has been hit hard, and it's not coming back. You'll have your handful of producers and utilities still in that market, but really, that's it. It's sort of becoming a niche product."
Production of and demand for NYMEX-quality barge coal has plummeted as the market has taken the biggest hits from the debilitating factors facing the entire US coal industry.
Retirements of power plants taking delivery via barge has cut demand by millions of st/year. Low-cost natural gas, especially from the Marcellus and Utica shales, has made CAPP barge coal much less competitive in the PJM Interconnection footprint. Bankruptcies of smaller producers and major companies Patriot Coal and Alpha Natural Resources have permanently closed dozens of struggling mines sourcing NYMEX-quality product.
Also, the emergence of a growing Illinois Basin barge market has cut into the CAPP barge footprint as a result of advancements in the technology for removing sulfur dioxide emissions.
"A lot has been working against the barge market for a long time," one producer based on the Big Sandy River said. "Now you're seeing the effects. It's much smaller."
CME CONTRACT TO BE DELISTED
In another sign of a declining market, the CME Group's physically-settled Central Appalachia barge futures contract will be officially delisted Wednesday. The exchange announced in May it would delist the product beyond December 2016 to no real surprise from market participants, who noted declining liquidity for the contract.
At its peak in 2009, open interest for CAPP barge futures stood at 14,052 contracts, but had declined to 627 contracts when the delisting was announced. Open interest has steadily declined this year into the double digits during the past few months as the futures' expiry came closer.
A broker said that, even without the futures contract, third parties could still facilitate CAPP barge deals, albeit with a little more risk involved.
But because the market has declined, the broker said he expects more one-on-one deals between producers and utilities as brokers look for business in more lively markets.
"The main issue is that it's now a much smaller arena, a lot smaller in eastern Kentucky, and in West Virginia the bigger [producers] left are going to do direct deals and don't need a trader," said the broker. "The biggest problem is who is going to originate NYMEX coal."
The financially-settled CAPP barge contract continues to be listed on Intercontinental Exchange.
BARGE PLAYERS
What's left of the barge market today are a handful of producers and even fewer domestic utility buyers.
"The CAPP barge market's size and demand has changed, and it's not a market anybody expects to come back," one trader said. "That market now is a few utilities and is a part in the swing export thermal market to blend down high-sulfur coal. We're not going to have the mountains of coal along the river like we used to."
Sources said most CAPP barge production will be split between Blackhawk Mining, Booth Energy, the reorganized Alpha Natural Resources and Contura Energy, with a spattering of traders and smaller producers shipping coal on the river. American Electric Power will be the primary consumer of NYMEX coal, with Duke Energy and Dayton Power & Light also major buyers.
Sources also noted the market's downsizing is starting to swing the origination source of NYMEX coal from the Big Sandy River to the Kanawha River. AEP's Kanawha River power plant is a major consumer of NYMEX barge coal, and West Virginia mines along the Kanawha have an advantage in truck haul rates and production costs over eastern Kentucky mines sending coal along the Big Sandy.
The producer on the Big Sandy said idled eastern Kentucky NYMEX mines will not restart or increase production for prices less than $60/st, but West Virginia mines under longer-term deals would likely be in the money in the mid- to high $50/st.
Loading docks have shuttered on both rivers in the past few years, sources said. Five loading docks, three with railroad access, are still operating on the Kanawha and six on the Big Sandy. One trader said two more facilities on the Big Sandy could close by the end of the year.
PRICE NEGOTIATIONS
Production cuts have severely limited NYMEX barge coal supply. One West Virginia producer said there is no spot availability along the Big Sandy or Kanawha rivers for the remainder of this year or early 2017.
That lack of availability has led to increased near-term pricing. A fuel buyer and multiple other sources said recent deals for CAPP barge coal through the first half of 2017 have been concluded above published index pricing in the low to mid-$50/st.
Platts assessed front-month CAPP barge at $54.75/st on Tuesday while the front quarter was assessed at $54.25/st and Q2 2017 at $52.25/st.
And because few producers remain in the market, future supply is still in question and longer-term pricing is expected to stay elevated, sources say.
Many sources said CAPP producers now almost always deal directly with utilities and will maintain a pricing edge unless one larger producer undercuts others' offers to move volumes.
"Just a few years ago utilities were getting 50-60 responses to CAPP barge [requests for proposals], now they're just getting a handful," one broker said. "If pricing is close [in those offers], that should give producers a little advantage."
Less available NYMEX tonnage will also mean longer-term contracts. A fuel buyer said utilities will have to work more closely with producers and will have to shift away from depending on a spot market to fill prompt needs.
"We always used to be able to pick up some short-term coal, but now producers are looking to sell for six months or more, likely a yearly contract," the buyer said.
"Yes, pricing is higher and it's made the market much more difficult," the buyer added. "We don't have the availability for one- or two-month deals."
