Slumping coal exports threaten rail and ocean shipping demand

To answer this question, FreightWaves interviewed Joe Aldina, manager of global coal analysis at S&P Global Platts Analytics. The good news is that Aldina does indeed see short-term transitory factors in play. The bad news is that he’s not optimistic on U.S. exports in the medium term.

Measuring the decline

The export trend had been quite strong until very recently. According to data from the U.S. Energy Information Administration (EIA), U.S. coal exports totaled 54.6 million metric tons in full-year 2016, surged 61 percent to 88 million tons in 2017, then rose another 19 percent to 104.9 million tons last year.

Coal is divided into two primarily categories – metallurgical coal, also known as ‘met’ or ‘coking’ coal, which is used for the production of steel, and thermal or ‘steam’ coal, which is used for power generation.

Met coal accounted for 70 percent of all U.S. exports in 2016. By last year, it was much more evenly spread, with met coal accounting for 53 percent, because steam coal exports grew much faster in 2016-18, up 180 percent versus met coal’s growth of 50 percent.

With production declining over this period due to lower domestic consumption, exports of coal, particularly steam coal, rose in importance. U.S. export volumes represented just 8.1 percent of production volumes in 2016. Last year, they accounted for 15.3 percent.

On June 6, the U.S. Census Bureau released coal export data through the month of April. According to a compilation of that data provided to FreightWaves by S&P Global Platts, 30.2 million metric tons of coal were exported during the first four months of this year, down 12.7 percent year-on-year. Outbound met coal volumes were down 10.8 percent and steam coal exports were down 13.8 percent.

The export pullback appears to be having a negative effect in the rail sector. According to data from the Association of American Railroads, 1.7 million carloads of coal were loaded in the U.S. between January 1 and June 1, down 4.7 percent year-on-year.

Drivers of 2019 decline

Aldina sees a combination of factors in play this year. First, coal commodity pricing is down from its lofty peaks in previous years. “The environment right now for booking spot sales out of the U.S. has definitely become much more bearish. Netbacks for thermal coal from the East Coast and Gulf Coast are at level where producers are not interested in selling additional cargoes,” he said.

Even so, there should still be cargoes moving this year based on contracts signed in 2018. “Hedging and forward contracting was widespread because the European price and the global coal prices were very high [in 2018] – prices were at multi-year highs for a sustained period. As a result, we had expected shipments this year to dip a bit but largely hold up, because producers and traders were able to hedge [in 2018], lock in their margins, and sell the volumes forward,” said Aldina.

Export volumes may be lower than they otherwise should be due to forward contracting because of severe weather disruptions. “Flooding in the Midwest slowed rail car loading and there has also been an issue with loading vessels in the U.S. Gulf because the [Mississippi] river is so high,” he explained.

“Weather is definitely a part of the story. It’s difficult to discern to what extent the volume decline is price-induced and to what extent it’s because of the flooding. We’re waiting to see if the [volume] drop-off is sustained through the summer after river levels have become more normal,” he said.

Another market dynamic affecting exports besides U.S. weather is the very low price of natural gas in Europe and elsewhere around the world, which renders steam coal exports less attractive to foreign utility buyers for power generation. That competitive effect is expected to remain in place.

“European coal demand is structurally declining,” said Aldina. “Europe’s coal burn is very weak this year because of low natural gas prices. It will be harder to move U.S. coal into Europe.”

2020 and beyond

He continued, “The next big demarcation point will be 2020, in terms of whether producers and traders have sold tons forward.” He noted that some of the public companies have recently reported that they do not yet have any 2020 export sales on the books.

“We could see a big drop-off in 2020. When the [current] hedges and contracts roll off, there could be a lot of downside in terms of exports.”

The EIA predicted in its May outlook that U.S. coal exports would fall 15 percent this year, to 88.8 million tons, then another 5 percent next year, to 85 million tons.

On a positive note, Aldina emphasized, “There are reasons to believe exports won’t fall off a cliff. There are some very good quality coals with very high energy content and there is a need to diversify in the [global] market. As the quality of the coals around the world in general declines, U.S. coals could be in greater demand.

“Also, the market may be mainly price-driven, but it’s not 100 percent price-driven. And on the coking coal side, pricing has held up. Overall, I wouldn’t say I’m necessarily hopeful when you look into the medium term, but I would say that U.S. exports are not going to go to zero.”

Ocean shipping fallout

The top four U.S. ocean ports that load coal are Norfolk, Virginia; Baltimore, Maryland; New Orleans, Louisiana; and Mobile, Alabama. Coal is generally loaded on bulkers of the Panamax (65,000-90,000 deadweight tons or DWT) or Capesize (100,000 DWT or more) classes.

The consequence of U.S. coal exports on ocean shipping demand is not measured in tons, but in ton-miles (volume times distance). A trade lane can have half as much volume, but still provide the same shipping demand if it covers twice the distance.

The more coal sold to destinations further afield, particularly Asia, the less declining export volumes will affect ocean shipping demand versus rail and barge demand. And vice versa if Asia volumes drop. Year-to-date data suggests that in 2019, the trend is more negative for ocean shipping than for U.S. domestic transportation.

In the first four months of this year, long-haul exports to the top four Asian destinations totaled 10.8 million tons, down 2.5 million tons or 19 percent, whereas shorter-haul exports to the top 13 Atlantic Basin and Mediterranean destinations (in Europe, South America and North Africa) totaled 16.5 million tons, down 570,512 tons or 3 percent.

The much steeper drop to Asia was driven by volume declines to India, South Korea, and China (which instituted a retaliatory tariff on U.S. coal last year), partially offset by a jump in volume to Japan.

According to Aldina, there are uncertainties related to future U.S. coal exports to Asia – but there are also opportunities.

“A lot of the demand for U.S. coal [in the future] will fall on China and India. And a lot that is not just about demand growth, it’s about the things these countries are doing on the [domestic] supply side. If you look at the restructuring China is doing on the supply side, it’s bearish in terms of knock-on effects for the seaborne coal market in the near term.”

Future sales to India could be particularly important to dry bulk shipping demand. A bulker voyage from Virginia to Mundra, India is over three times longer than the trip from Virginia to the Netherlands.

Aldina highlighted future prospects for sales to India, pointing out that “Northern Appalachia coal is a very good substitute for petcoke.”

Petcoke is a petroleum refining byproduct used as a fuel source and considered a major generator of harmful emissions. Ironically, given all of the environmental fallout for coal miners in America, coal is seen as a cleaner option in places like India.

“In the run-up in petcoke prices, Indian buyers looked to Northern Appalachian coal as a substitute, and India is likely to encourage more coal use compared to petcoke because it’s less polluting,” he said.

“So it’s not all bad news for U.S. exports. There are some bright spots.”