U.S. Coal Generation Trajectory: What Are Coal Miners Saying

How fast do miners expect coal generation to decline in the U.S.?

U.S. Coal Generation Trajectory: What Are Coal Miners Saying
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Most of the public U.S. companies with thermal coal exposure have reported their third quarter earnings

We summarize the takeaways relating to supply and demand and ultimately the path for coal generation in the U.S.

High natural gas prices have made coal-fired power more economic, slowing the pace of retirements

Rail and transportation constraints have limited coal supplies

Coal demand is likely higher than available supply, which should provide price support for 2023

Coal miners appear to accept the fate of U.S. coal generation, but expect to be supplying coal to power plants for at least another 5-7 years

We provide our estimates of coal generation declines

Conference Call Chatter

Selected text from U.S. thermal coal miners relating to supply and demand for coal for power consumption is provided below.  

High level takeaways:

  • Coal supplies in the U.S. are tight, exacerbated by rail reliability
  • Some coal retirements in the U.S. are being delayed
  • Miners are not investing for growth but are rather harvesting cash from thermal assets
  • No coal plant has been built in the U.S. in ten years
  • With the average coal plant age approaching 50 years, mechanical and cost-driven plant retirements are going to happen regardless of policy
  • Coal demand - and thus coal generation - could stabilize for a year or more a supply catches up to demand, but a steep decline in U.S. coal generation is expected by miners

Peabody Energy (BTU):

In the United States, the coal market continues to be very tight as strong demand for electricity generation competes with persisting transportation issues impacting supply to utilities. Overall electricity demand increased more than 3% year over year, positively impacted by weather and economic activity. However, year-to-date electricity generation from thermal coals declined year over year due to coal conservation by utilities to build coal stockpiles given concerns with rail performance.
U.S. natural gas prices remained elevated, although lower than record highs earlier this year. Numerous factors will impact coal utilization heading into the winter, including resolution of transportation issues, weather, renewable generation, and natural gas prices. Across the U.S., we continue to see growing caution regarding the pace of energy transition and the value of dispatchable capacity. Evidence of this are announcements of coal plant retirements being delayed, with most utilities citing grid reliability concerns or delayed renewable projects. This speaks to continued strong coal demand for U.S. coals. Overall, we anticipate continued near-term market volatility as coal demand fluctuates and supply remains constrained across the globe. Our diversified platform is positioned to participate in each of these markets, optimizing results by managing the needs of our diversified customer base.
So in the domestic U.S. thermal, we like the assets that we have. They're low-cost assets both in the PRB and in the Midwest. And earlier in the year, we've announced some investments in equipment for those mines. And we've also, in the first half of the year, we invested in uncovering some more coal in the PRB to be ready to meet some demand here. So our investments in our U.S. assets, Dave, are to, I'd call it, small incremental growth off of our existing asset base, nothing significant as far as capital investments there. It's basically taken what we have, putting some more of the equipment back into service, hiring people to man the equipment, and then that can fluctuate with demand. That would be how we're looking at our U.S. assets -- U.S. thermal assets that is.

Arch Resources (ARCH):

Transitioning now to the legacy thermal side of the business, I'm pleased to say that we continue to deliver on the plan for the Thermal segment by generating substantial amounts of operating cash flow while managing CapEx tightly. Fortunately, we are confident we can accomplish this even while continuing to manage through significant rail service issues, specifically in the PRB. As Paul noted, the Thermal segment has generated nearly 10x more segment-level EBITDA than it has invested in capital over the past 6 years, and the thermal team delivered more of the same in Q3. To reiterate, the thermal operations generated $97 million of EBITDA during the quarter against less than $5 million in capital.
I don't think really anything has changed in the PRB. And we could all argue the public policy side of this. But I look at it from a pretty pragmatic point of view. Last coal-fired power plant was built 10 years ago in the United States and the average age is creeping up 47, 48 years. This trend is continuing. I think we'll see slowdowns in retirements over the next 2 or 3 years. But this thing is heading towards a pretty fast decline rate. And I think as we look at what we're doing, we're taking into account that ultimately glide path on thermal coal consumption in the U.S. and we're tailoring our Black Thunder operation towards it. And I think we could have and the industry could have on the thermal side, a very profitable period of time where this call is going to be needed, and we'll do very well. But what we're not going to do is invest anything to increase production. If anything, we're just going to continue to follow the market. And I think the industry will do well if that's kind of the pack that's taken.
Mike, we were at about 1 billion -- 1.1 billion tons of thermal coal consumption in the U.S. Last year, that was about 520 million tons this year around 490 million tons. So look, we -- the reality is a progress for the company. We're pitching out and we're seeing retirements. We could see some extensions. In fact, we've seen about 15 gigawatts of extensions announced here in recent months, which is certainly helpful. We have about 500 million tons of reserves still in the PRB that are permitted and that we fully intend to mine that would allow us to produce at these sorts of levels for the next several years and generate a lot of cash there. But in the end, we do believe that the fleet is going to age out because we aren't building any new coal plants, as Paul said, we are getting age on these plants.
So our view hasn't changed, but we certainly believe there's an opportunity to generate a lot of cash over the next 5 to 7 years from these assets. And we've built a really strong book of business that we plan to leverage. The fact is that, that book is not just strong for 2023, but we've got a lot of length on it as well. We've got strong commitments for 24, 25, 26. So I feel good about what we can do there. But we don't -- we have -- our view of where thermal coal consumption is going in the U.S. hasn't changed.
I guess one final point but this year, coal conservation has been a significant part of the step down in consumption. -- utilities just aren't able to get the tons. So I would say that we are seeing a little stabilization likely could have seen generation and coal demand for power generation at roughly equivalent to 2021 levels this year, but utilities can't get the coal. So the fact is that demand has stabilized here a bit, and that could persist.

CONSOL Energy, Inc. (CEIX):

Henry Hub natural gas spot prices averaged $8.03 per million BTUs in Q3 '22 compared to $4.35 per million BTU in the prior year period. PJM West day-ahead power prices hit the highest quarterly average in over 8 years, finishing Q3 '22 at $9.44 per megawatt hour. In the global thermal coal markets, demand remains robust as a result of tight supply. Domestically, coal-fired electric generation units are delaying retirements, and internationally, we are seeing countries bring back coal-fired electricity-generating units, particularly in Europe. Wood Mackenzie estimates that power demand will accelerate in India as the country comes out of the monsoon season in Q4. The burden to meet this incremental demand will fall on coal due to the lack of alternative energy sources. Domestic supplies in India will be prioritized for power generation, and this will increase export demand for the nonpower generation sector, which we serve.
Mike, what we have seen over the last quarter is we have seen our customers build inventory, and that was by design, getting prepared for winter. And as I mentioned on previous calls, aside from some transportation issues that happened earlier this year, which did challenge utilities from getting coal, I believe many utilities were just simply underbought. And therefore, they were burning gas uneconomically or just simply not running. But looking ahead, for the balance of this year, assuming a normal winter, I would expect overall coal-fired generation to improve and the demand for coal to remain strong throughout 2023.
In terms of the delayed retirements, not really many of those retirements were in our core marketplace, but we have supplied coal to some of the plants that are announcing delays. We have one in South Carolina. We also have another in Indiana that I can recall off the top of my head. But the consensus there is, again, there will be strong demand for coal. And the difference today versus before, and you heard Jimmy say this many of times, is there is just not a supply response. So by definition, you should see, again, the demand over -- or be higher than the supply, which should be beneficial to us