A leery domestic Central Appalachian thermal coal market is anxiously awaiting word from Duke Energy on term contracts that could stretch as far out as 2020.
Sources told S&P Global Platts on Monday that the utility, which burns the most CAPP coal in the US, could soon award deals for Q4 2017 delivery as well as for 2018, 2019 and 2020.
Producers said Duke has contacted certain miners with follow-ups to their offers, but has yet to complete any transaction. Some said they could get a decision as early as this week, while others expect deals to come later in the month.
One source close to negotiations said Duke is still "digesting" offers, with hopes to have most deals signed off the solicitation before the Thanksgiving holiday in late November.
The same source said Duke is expected to first concentrate on its CAPP contracts associated with the solicitation ahead of tonnage sought from the Illinois Basin because of tighter restrictions on CAPP volumes. The source said there was a "downward trend" in volumes coming from CAPP producers in term offers further out, but added the decline was "nothing alarming."
No specific tonnage was requested by Duke per delivery term and optionality in volumes is expected, with the utility mixing in spot buys as needed. Final Q4 2017 volumes are anticipated to depend on winter demand, but the utility is looking ahead to "pretty strong burn" for coal in 2018 and 2019, depending on gas prices, the source noted.
Pricing will determine if any deals are made for 2020, the source said.
PRESSURE ON PRICES
Some producers said they are concerned contracts awarded for 2018 and 2019 could come at low values and push down what has been a quiet domestic market as miners look to discount prices in order to lock in substantial tonnage.
Offers to Duke for CSX-quality 12,500 Btu/lb coal for Q4 2017 will likely be near $60/st or slightly higher because of tightness, producers said. One CAPP player noted hearing offers elsewhere in the market on Monday at $60/st and bids at $58/st.
But while prices remain strong for the winter, producers said term 2018 and 2019 contracts to Duke could come anywhere from the low $60s/st down to the mid-$50s/st.
Thermal prices -- in what has been an inactive domestic market since the summer because of poor utility demand -- have been lifted by new calls in seaborne volumes. As CIF ARA 6,000 NAR prices neared $90/mt, CAPP became an export player, with as much as 4.5 million st likely to head to ports this year, one producer said.
"I hope export prices stand there," the producer said. "If you didn't have all that CAPP coal go to export this year, you'd be looking for another home for that, and I'm not sure you would have found one.
"On the thermal side, you have to be ready to cut production as the prices fall -- you just can't operate and survive."
On Monday, Platts assessed CIF ARA 6,000 NAR at $90/mt for delivery in 15-60 days, but the Cal 2018 financial contract was assessed 11.8% lower at $79.35/mt. It's that expected decline in export prices that could lead to lower domestic values in 2018 and beyond and incentivize producers to lock in tons with Duke.
"You hope for pricing with a 6 in front of it, but I'm worried we'll see a 5," a producer said.
