Mon, February 5, 2018 9:16 am
Coaltrans USA Recap: DTC’s Andy Blumenfeld, Dianna Ridgway and Steve Ristevski were among the fortunate ones to enjoy some Florida sunshine last week while attending the Coaltrans USA conference in Miami, as well as a NYCTA golf outing at Key Biscayne. The mood was enthusiastic and optimistic, especially for US exports, both on the thermal and met sides. Andy sat on a panel that discussed coal vs natgas competition, balancing load with increased share of intermittent renewables and the outlook for global gas demand and prices considering the growing LNG market. Below are key takeaways:
- Heavy Demand from Seaborne Market for US Coal: We met and spoke with multiple delegates from China and India who were at the conference solely in a quest to source US coal, only to run into port capacity limitation (details below). One Chinese buyer said the extreme winter temperatures and heavy snowfall, along with rising mining costs at their operations in China have prompted her company to seek out US supplies, preferably from the PRB/Montana. She shared that at current PRB prices and rail haulage rates (which are ballpark since BNSF isn’t even providing quotes given the lack of port capacity), the voyage would make sense. Additionally, European demand for US coal remains robust with Turkey, Poland, Ukraine and Germany all looking for coal from US mines. Cloud Peak Energy (CLD) CEO Colin Marshall said South Korean customers of their 9,300 btu Spring Creek product only buy a quarter ahead so they’re not completely sold out for 2018 yet.
- Access to Capital: During a panel discussing financial markets and access to capital, speakers agreed that US coalcos fall into one of three buckets: 1) legacy companies that emerged from bankruptcy; 2) legacy companies that avoided bankruptcy; and 3) newer, startup companies. Jeremy Sussman of Clarksons Platou Securities said after emerging from bankruptcy, coalcos are better positioned and spending significantly less in both interest expense and capital expenditures. He reminded that Peabody Energy (BTU) spent $1.2 billion in capital expenditures in 2012 compared to expectations to spend approx. $175 mm this year and added that capital today is too expensive, as opposed to being non-existent previously. He believes the recent trend of under investment will lead to market tightness in the future. Jesse Parrish, CFO of Blackhawk, a private miner with publicly traded debt, said they are in a “wait and see” mode for 2018 and currently focused on how to generate liquidity for their investor base.
- Maintaining Production Discipline: Colin Marshall said he believes CLD is not getting a sustainable return for their PRB coal and they need to be better at demanding a price that it’s worth. He also cautioned against smothering “brush fires” with increased production. Adam/Paringa echoed that sentiment in his comments that the US market is over supplied in some areas and that companies need to maintain a certain degree of discipline as they bring on new supply.
- Port Capacity: US export terminal capacity was a continually reoccurring topic of discussion in our conversations with fellow conference attendees. Though seaborne demand for US coal is strong, exports are ultimately limited by available port capacity, particularly off the West and East Coasts. We spoke to one delegate who said Kinder Morgan’s Pier IX terminal at Hampton Roads is completely booked for 2018. Previously we have surmised that missed shipments from the ‘bomb cyclone’ in early January would be made up during Q1 assuming operations returned to normal and no further weather-related disruptions. Now, with vessel schedules booked so tightly for the balance of the year, we are unsure that catching up will be possible that quickly, given there doesn’t appear to be any ‘wiggle room’ in the system. With Westshore operating at capacity and the East Coast at or near capacity, the only available option now is the use of the river system down and out through the Gulf. Significant headwinds still remain ahead of West Coast export terminal projects (Fraser Surrey, Millennium Bulk, Oakland) but if they are made possible, increased exports of PRB coal will have a home waiting for them in Asia. Word is that Teck Resources, Canada’s largest coal exporter, has capacity at Westshore Terminals up for renewal, so other shippers and exporters are watching closely to see what they do with those contracts.
- International Coal Flows: Matt Moore, Senior Coal Trader at Vattenfall, voiced his view that a strong Asian market can pull Colombian coal out of the Atlantic/European market, which is the natural destination for US coal off the East Coast, creating an opportunity for US suppliers to fill. He expects US coal exports to be flat to slightly higher in 2018. Gustavo Fernandez of Uniper believes they’ll be up by 5% YoY. NEWC price of roughly $85/MT opens the door for CO coal.
- Opting Between Domestic and Export Sales: Adam Anderson, SVP – Marketing/Sales of Paringa Resources talked about the industry-wide trend facing US coal producers in today’s market—finding the right balance for their own companies between serving domestic customers and participating in the hot export market. While they “certainly want to do both”, they need to look at the value of both and ensure the deals make sense while still providing good service to their core, domestic customers. Paringa expects to begin initial production in Sept/Oct 2018 but will serve its cornerstone contract first and won’t be looking at export opportunities until Q2 2019. Jesse Parrish/Blackhawk added that they like the stability of domestic met and value those relationships whereas the volatility of export prices is sometimes dependent on where assessors mark it at.
- New Sulfur Threshold in Turkey: News of Turkey raising their sulfur threshold for imported coal to 3% (from 1-2% previously) hit the market just as conference events were kicking off. This is positive for higher sulfur US coals from the Illinois Basin and Napp. We spoke to one European importer of US coal who heard that a Turkish utility’s boiler was having issues after burning US coal with high chlorine content (when burned, chlorine becomes hydrochloric acid and can tear up boiler tubes). A couple delegates we spoke to believe this is one reason why Murray Energy is buying Armstrong’s operations, to blend down high chlorine content in export shipments.
- Steel and Met Outlook: According to Mike Grim, Vice President of Oremco, there will be a 3 mm MT increase in US steel output in 2018 (vs 81.6 mm MT in 2017), which equates to roughly 2 mm tons of incremental coal demand, and he expects a greater increase in 2019. As far as US met demand goes, though the present political climate provides great optimism, European customers are cautious and concerned while economic and political issues make Brazilian and South American demand less stable. Fellow panelist, Mike Hardesty of SunCoke Energy, said they are proceeding with cautious optimism in 2H 2018 and that most coke batteries are currently running at or near capacity. He estimates approx. 300 – 400K tons of coke capacity isn’t being used, equating to around 400 – 450K of coal demand. SunCoke is currently working on the logistics to export US coke (which can deteriorate each time it’s moved), adding that at current Chinese coke prices, US coke exports are on the edge of being in the money. In addition to low investment in coal, there has also been reduced investment in the past 2-3 years in electric arc and blast furnace units due to tight capital markets. He said he can think of four coke ovens that would have been under pressure to close if Obama would have stayed in office but now that pressure has ceased to intensify. Additionally, he opined that we’re reaching a cap without the introduction of some sort of new technology.
- Utility Coal Buyers: One of the more informative panels featured coal buyers from three utilities: Ginny Farrow of NRG Energy (NRG), Tris Swindle of Southern Company (SO) and David Owens from TVA.
- Coal Inventories: David shared that some of their plants target 30 days while another targets 60 days (depending on each unit’s expected burn and access to transportation) but on average, TVA targets around 30-40 days of inventory company-wide. He added that falling coal inventories are due to coal units closing, so it is not triggering any new buying activity for them at TVA. Ginny/NRG passionately expressed her view that being low on coal means the utility is making money and it’s actually a good problem to have, saying “though I don’t want that stress, I do like it.” She described coal stocks as cash sitting there that could be deployed elsewhere and in buying decisions, said utilities need to evaluate cost of carry, free cash flow and lost gross margins.
- 2018 Coal Burn: Tris informed the audience that Southern burned approx. 35 mm tons of coal last year and expects to do about the same in 2018. All panelists spoke to the trend of more renewables being imbedded into their systems and the ensuing expectation for coal units to serve as load following with quicker than ever response times (not only to back up wind/solar but to serve as backup for gas units as well).
- Buying Behavior: In light of expectations for shorter response times for coal units, Ginny/NRG said the number one thing she’s looking for from coal suppliers is flexibility, regarding contract terms, volume and price. Tris/Southern also shared that whereas they were previously buying on 5-10 year contracts, now a 2-year deal is considered long-term for Southern, as they are buying a lot of spot coal and also love to see a lot of optionality in contracts.
- Grid Resiliency Rule: None of the panelists had particularly supportive comments to make regarding DOE Secretary Perry’s failed attempt at introducing the Grid Resiliency Rule. When Bob Murray inquired about the lack of enthusiasm for the rule from utilities, both David and Tris shared that they would be “hard pressed” to find the space to carry 90 days of coal inventory at their plants, even if they wanted to. Tris said significant space is now being taken up by baghouses, scrubbers and other environmental control equipment. And Ginny added that they’d like to see less federal interference in electricity markets and are ultimately focused on the objective of providing their customers with the lowest electricity price possible, regardless if that means from gas, coal or renewables.
- Bob Murray Opens Conference: Owner/operator Bob Murray of Murray Energy gave the opening address of the event, sharing his views on federal regulations, FERC’s response to the proposed Grid Resiliency Rule and limitations to US exports, among other topics. He said the largest limitations to growing US exports are lack of rail performance, sulfur discounts, port capacity, the perception that US supply is temporary and shortage of capital.
- 2018 Projected Production: 76 mm tons of thermal coal, comprised of 46 mm tons from Murray (OH, KY, UT and WV), 22 mm tons from Foresight Energy (IL), 4.5 mm tons from overseas operations (Colombia) and 3.5 mm tons from Murray Kentucky (Ill Basin, former Armstrong).
- 2018 Expected Exports: 22.5 mm of projected production above is planned for export, including 12 mm tons from Ill Basin through Gulf ports, 6 mm tons of Napp coal through East Coast, 2.5 mm tons of Utah coal going through Guaymas, Mexico and New Orleans, and finally 2 mm tons from the Murray Kentucky acquisition out through the Gulf.