With Illinois Basin thermal coal output expected to decline by up to 30% on an annualized basin in order to better meet 2020 demand, it will require adjustments and restructuring from regional producers, according to analysts and executives.
“In our opinion, among the major US thermal coal basins, the [Illinois Basin] presents the best prospects from a supply-demand perspective,” due to a surge in recent mine closures and idlings, B Riley FBR coal analysts said in a research note. “This is in contrast to other basins, in which the estimated surplus is much deeper as the supply response has not been as strong.”
According to US Energy Information Administration data based on estimated weekly production, the basin’s output will annualize to 82 million st this year, down 17.7% from 2019.
Joe Craft, Alliance Resource Partners CEO, said in January that Illinois Basin output would be in the mid-80s million st. However, during the company’s first-quarter 2020 earnings call, he said expectations have lowered to the mid-70s million st for 2020.
Mine Safety and Health Administration data show Illinois Basin output totaled over 19.2 million st in Q1, a 30.7% decline compared with the year-ago quarter, while the major producers in the basin largely faced Q1 production declines of about one-third compared with Q1 2019.
Alliance Resource Partners output declined 36.3% year on year in Q1 to nearly 5.4 million st. Foresight Energy’s production in the most recent quarter fell 37.1% on the year to 3.8 million st, while Peabody Energy’s output dropped 26.9% to 3.3 million st. Hallador Energy saw its production fall 22.9% to 1.7 million st, and Murray Energy’s output slumped 37.5% to 730,286 st.
“Everything for me is sort of hovering around that 30% drop,” Craft said. “I mean, everything we’re doing is about 30% to our contracts.”
Brent Bilsland, CEO of Hallador, emphasized the magnitude of coal mine idlings and closures during the company’s most recent earnings call. Since January 2019, he said, 15 million st of coal production in the Illinois Basin was idled or closed, 80% of which was permanently closed. However, Hallador estimates another 15 million st was removed with no public announcement.
“We do believe that everybody is working at reduced shifts,” Craft said. “They’re taking time off. They’re having to manage their supply to meet their customer transactions because there’s just no spot market.”
B Riley concurred in the research note that stockpiles remain elevated and said coal burn is estimated to be down 30% year to date in all major US basins due to a mild winter, weak natural gas prices and the coronavirus pandemic.
NEW NORMAL
Given the steep declines in demand and production, producers will have to adjust to a new normal.
On Peabody Energy’s Q1 earnings call, executives said the company had lay off up to 250 people in the quarter in its Powder River Basin, Midwest and Western regions in order to better meet customer demands.
“With those actions, we would expect a second quarter restructuring charge,” CEO Glenn Kellow said during the call.
Other producers in the basin filed for Chapter 11 bankruptcy protection, including Murray and Foresight, and are currently undergoing restructurings.
Alliance Resource Partners said in its Q1 earnings the company would be taking a number of measures to boost liquidity in 2020, in addition to its previously announced distribution suspension.
According to Paul Lang, Chief Operating Officer of Arch Coal, “we reported a negative margin in both of our thermal segments in the first quarter. Anticipating that those challenges are likely to persist at least through Q2, we’re moving quickly to adjust our production plans and cost structure to be prepared for the potential of lower sales for the balance of the year.”
“We’re cautiously optimistic that these efforts will deliver improved results in the second half of 2020, recognizing, of course, that the unknown duration of the economic shutdown makes forecasting exceptionally difficult,” he added.
“In short, the lack of utility demand, when combined with no meaningful export valve, continues to wreak havoc on the basin,” according to a Benchmark Company report.