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Powder River Basin coal producers must cut production to boost prices: analyst

Powder River Basin coal producers competing with cheap wind generation and natural gas-fired power will need to reduce production sharply for prices to rebound, an analyst said Friday.

Such a reduction would amount to about 35 million st in the PRB, bringing annual output down to roughly 380 million st, for prices to return to prior levels, said John Hanou, an Annapolis, Maryland-based consultant who co-authored supply and demand studies for both the PRB and Illinois Basin. Hanou projects the PRB, including mines in Wyoming and Montana, will produce between 409 million st and 412 million st in 2015.

"Producers are getting hammered by wind power and gas prices in the low $2s and that affects everybody," Hanou said. "The coal plants just aren't running."

US utility coal stockpiles totaled 158.05 million st for the week that ended October 29, up 1.4% from the prior week and up 17.2% over the prior year, Platts data showed Friday. In the PRB, production was flat on the week at 8.1 million st, but down 7% year on year.

Peabody Energy, in its October 27 earnings call, reported long-term contract prices for 113 million st of PRB production of $13.67/st for 2016. However, an additional 24 million st for 2016 was priced in Q3 at $11.26/st. and PRB 8,800 Btu/lb front-month prices averaged $10.51/st during the quarter, according to Stifel, another Annapolis, Maryland-based firm.

In a quarterly filing, Peabody said the largest share of production decreases is occurring in coal regions outside of the PRB, where demand pressures are the greatest.

"The reduction in demand has outpaced the supply response, resulting in rising stockpiles totaling approximately 75 days of supply in the PRB and approximately 90 days in the Illinois Basin," Peabody said. A healthier stockpile level would be roughly 35-40 days, Hanou said. For that to happen, production would need to fall, he said.

"If you want PRB coal to get back to $13.50/st, stocks need to drop 35 million st," Hanou said.

Another PRB producer, Cloud Peak Energy, also reported its earnings this week amid the challenging pricing environment. Cloud Peak, which has three mines in the basin, already has announced 14 million st of cuts this year at the Cordero Rojo mine in southern Wyoming. Cloud Peak plans to maintain production at the Antelope mine, where it will begin operating a new dragline in 2016.

Cloud Peak has currently committed to sell 78 million st from its three PRB mines under fixed-price contracts with a weighted-average price of $12.73/st. For 2016, the company has committed to sell 67 million st, including 57 million st under fixed-price contracts with a weighted average price of $12.95/st.

During the quarter, it contracted to sell 6 million st for 2016 at an average price of $11.17/st, according to a 8-K filing.

source: http://www.platts.com