Is there light at the end of a dark tunnel for US coal markets?

Stronger natural gas prices and the February deep freeze have driven a recovery

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Natalie Biggs

Global Head, Base Metals Markets

Natalie is the global head of our thermal coal markets research for the Metals and Mining group.

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US coal markets are seeing a strong recovery from the abysmal market conditions in 2020. Can this resurgence continue this year?

In a recent insight, we looked at the drivers behind the recovery and whether the US could in fact see a supply shortage this summer. Fill in the form for a complimentary copy of the full insight. Or read on for an introduction.

Up from the ashes, coal recovers from 2020 lows

US producers are emerging from the worst coal market that the country has seen in around 50 years. In 2020, US coal production dropped to 532 Mst, losing nearly a quarter from the previous year and a hefty fall from the peak of US coal production of 1,168 Mst in 2008.

While some of the loss was pandemic-related, the major driver behind poor coal market conditions was very low natural gas prices – these averaged below US$2/mmbtu through most of last year.

In 2021, the market appears to be getting off to a strong start, aided by tightening gas supply and freezing weather conditions in February.

The impact of the deep freeze

The polar vortex plunged most of the continental US into a deep freeze in mid-February. This caused heating demand for electricity to soar.

A sudden run on natural gas, led to a spike in gas prices and record levels of natural gas storage withdrawals.

The headline for the polar vortex event in February was the breakdown of the Texas power grid during the freeze. The lack of weatherization on power sources and demand levels well above planned ‘worst-case’ scenarios for that time of year, resulted in blackouts lasting several days. All forms of generation in Texas had issues in the extreme cold. But, as renewables were not expected to perform particularly well at that time of year, the bulk of the reliability issues must lie with fossil fuel generators.

However, for the bulk of the US power system, the availability of coal units was critical to maintaining power levels, especially as renewables performed at lower-than-expected rates (average seasonal capacity factors) during the height of the crisis.

Not all basins performed evenly during the February freeze. Powder River Basin (PRB) consumption increased only 49% from the previous year, compared with over 60% for Illinois Basin (ILB) and Central Appalachia (CAPP), while Northern Appalachia (NAPP) more than doubled. It's likely that the coal plant weatherization issues in Texas hampered PRB consumption, while ILB, NAPP and CAPP burning plants in the east were properly outfitted for freezing conditions.

Coal consumption was up 60% in February from the previous year – before the coronavirus lockdown measures were put into place. Both February 2020 and February 2019 were very mild, so perhaps a better comparison is January 2019, which had similar heating degree days as February 2021.

But could the US be heading for a coal shortage?

With a strong start to coal generation levels and improving coal-gas competition expected through 2021, what are the expectations for US coal supply this year? Despite strong signs of a revival, producers and utilities are hesitant to increase production. Judging by utility contracting levels and producer guidance from quarterly reports, the US market could be facing a supply shortage come summer.

Find out more about our analysis on market conditions, including charts on mining productivity and production capacity. Fill in the form at the top of the page to read this report in full.

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