No end to the bearish sentiment in the US utility coal market is expected through 2020, according to analysts at Seaport Global, as a result of low domestic natural gas prices and a weak export market.
The utility coal "market started the year in good shape, but has gotten materially worse ever since," driven by a low front-month gas futures price, Mark Levin, senior analyst, and Nathan Martin, senior associate analyst, wrote in the Seaport note Tuesday.
The CIF ARA coal market has been "obliterated," with the front-month price falling $26.70 to $59/mt between the start of the year and Monday, as a result of mild weather, cheap gas prices, high carbon allowance prices and plentiful Russian supplies.
"The net result was significantly weaker coal prices in key US export basins like Northern Appalachian and the Illinois Basin," the analyst said, noting price falls of 27% and 19% over the period, respectively.
And the analysts said most investors expect the US utility coal market will be worse in 2020 than it is in 2019.
"Investor negativity toward the steam market rests on two somewhat obvious factors: (1) low natural gas prices eating into coal demand; and (2) weak API2 prices causing US steam coal exports to get cut anywhere from a third to a half," they wrote.
The latter factor is putting additional pressure on US utility coal prices as tonnes previously intended for the seaborne market will be forced remain at home, creating an even larger imbalance given what is already a tepid demand environment.
"If these tons can't find a home, bears argue that coal producers must cut their sales figures, creating a triple whammy effect - lower coal prices, lower coal volumes, and higher costs due to less operating leverage," the analysts added.
While API2 prices for the full-year 2020 period had their best week since the start of the year last week, driven by a 5% on a rise in US gas prices, "US producers are still far out of the money," the report noted, adding that concerns over IMO 2020 sulfur regulations causing a fuel oil surplus and pressure on NAPP exports to India are growing.
"In short, negativity toward thermal coal is everywhere," they wrote.
Seaport analysts expect met coal prices to continue dropping through the second half of the year, given softening steel prices and margins and a better performing Australian supply chain, but will "not crash to levels anywhere close to where they were in 2015-2016."
