Unusual warmth from late December 2022 into January in the U.S. and Europe drove declines in natural gas spot prices, pressuring U.S. export coal on increasing competitiveness of EU gas plants.
Over the next five to 10 years, the domestic steam market is forecast to come under increasing pressure from the expansion of zero-carbon electricity incentivized by the Inflation Reduction Act of 2022, enacted in August 2022. In aggregate, the S&P Global Market Intelligence Power Forecast now projects 58.7 GW of coal plant retirements by 2030, while 384.0 GW of wind and solar capacity is forecast to come online. Remaining coal plants will see their generation dramatically reduced; Market Intelligence forecast that U.S. electricity demand for coal will decline 33.6% by 2030, accounting for just 10.4% of electricity generation.
Mild January weather reduced spot natural gas prices in the U.S. and Europe, pushing down coal prices as well. U.S. export coal prices fell the most, surrendering most of their pricing gains from the last two months. Inventories of steam coal improved substantially this past fall, indicating less demand pressure going into summer 2023. In the mid to long term, the rapid growth of renewable generation spurred by the Inflation Reduction Act is forecast to reduce coal plant capacity by 58.7 GW by 2030 and to cut overall U.S. coal generation by a third.
Export coal prices fell substantially during January, with domestic coal prices easing as well. Part of the decline was seasonal as the prompt delivery period moves into the spring shoulder season. But the downward movement also mirrors declines in spot natural gas prices as the peak winter season turned unusually mild. CAPP export benchmarks plunged $76.20/ton, or 35.3%, to $139.65/ton. NYMEX CAPP dropped $45.60/ton, to $130.00/ton. NAPP Pittsburgh Seam 13,000 Btu per pound shed $91.95/ton, or 43.8%, to $117.75/ton, while Illinois Basin 11,500 mid-sulfur fell $49.00/ton, to $124.50/ton, or 28.2%. The NYMEX Powder River Basin benchmark eased 10 cents/ton, or 0.6%, to $15.45/ton.
Warm weather in the Northeast resulted in gas demand falling enough to increase storage levels in the first week of January, an unusual occurrence. Persistent low spot prices discouraged withdrawals throughout the month. Henry Hub opened at $3.52/MMBtu and declined further over the second half of the month to close at $2.82/MMBtu. Total gas in storage moved from modest deficit to surplus, with levels as of Jan. 27 at 2,583 Bcf, 162 Bcf higher than the five-year average and 133 Bcf below 2022's levels.
Regional natural gas markets, except for the West, exhibited differentials more typical of summertime. Chicago Gate natural gas averaged an 8 cent/MMBtu discount to Henry Hub during January at $3.24/MMBtu, while TCO Pool was discounted 60 cents/MMBtu at $2.72/MMBtu. TETCO M3 traded at a 32 cent/MMBtu discount at $3.00/MMBtu. SoCal's premium to Henry Hub fell during January but remained strong at $14.11/MMBtu for a spot price of $17.42/MMBtu.
The U.S. Energy Information Administration estimated October 2022 coal stockpiles at 88 million tons, an 8 Mt increase from September 2022. If restocking continued into winter, inventories might finish the year at normal or surplus levels, potentially holding back demand in 2023.
The chart below shows the current price forecast for the PRB 8800 and 8400 markers.
With less exposure to export markets, Powder River Basin coal prices have eased to more normal levels compared to eastern bituminous coal. Current forward pricing reflects a competitive equilibrium for generation against natural gas and expected normal inventory levels to end 2022. As natural gas prices increase, Powder River Basin prices are forecast to rise above $16/ton by 2026. Declining demand will tend to restrain price growth in the medium term, although natural gas prices remain high enough to accommodate further appreciation in Powder River Basin coal prices.
Growth in bituminous coal prices in response to export pressures puts coal generation in a higher-priced position relative to U.S. natural gas, reducing already-thin domestic demand for coal over the next two years. Export coal markets, while steady, also show signs of moderating as high prices temper demand.
Pricing benchmarks exceeding $60/ton indicate strong returns on domestic coal, even if not all demand can be accommodated. S&P Global Commodity Insights estimates that coal and natural gas prices are in competitive equilibrium, which will limit growth in bituminous coal demand that would otherwise be attributable to higher natural gas prices. By 2023, bituminous coal demand for electric generation will start to fall, easing current price pressures. Overall, eastern coal demand is forecast to decline 49 Mt from 2022-2026 as both steam and metallurgical demand ease from current levels.
Outlook for US coal production, demand
For the four weeks ended Jan. 28, coal shipments averaged 11.9 Mt, a robust 9% higher than January 2022 levels, with shippers making up for restricted volumes in late 2022.
The chart below compares the current production forecast with recent history. Despite competitive economics against natural gas, year-to-date shipment results indicate that electric-sector coal demand will fall from 2021 levels, from 508 million tons to a forecast of 472 million tons in 2022. Commodity Insights forecasts 2023 electric-sector demand will fall further, to 417 million tons on increased retirements and greater competitiveness of natural gas generation. After 2023, additional coal retirements combined with expanding renewable electricity generation are projected to steadily reduce coal generation demand. The overall coal market, that is, domestic demand and exports, is projected to decline by 135 million tons between 2022 and 2027.
Production outlook Powder River Basin
Despite relatively low prices, Powder River Basin demand was modest through the end of the third quarter of 2022. Commodity Insights now forecasts 2022 coal production at 265 million tons, 3% higher than 2021 levels. Demand is forecast to move modestly higher in 2023 to 270 million tons as natural gas moves into a more price-competitive position than in 2022. After 2023, Commodity Insights projects that coal generation retirements in the Midwest, easing natural gas prices and a substantial expansion of wind generation in Powder River Basin's core markets will shrink coal demand to 201 million tons through 2027. Coal plant utilization is forecast to continue declining, driving production down to 151 million tons through 2030.
Production outlook Illinois Basin
Illinois Basin coal prices held firm into the fourth quarter of 2022 amid stronger export demand, before fading in January. Commodity Insights forecasts 2022 production at 77 Mt, 5% above 2021 levels. Expected high price levels are forecast to constrain demand in 2023, with production falling to a forecast of 60 million tons. The expansion of wind generation incentivized by the Inflation Reduction Act is forecast to further erode Illinois Basin coal demand, in addition to coal retirement announcements over the next three years. Coal production in the Illinois Basin is forecast to fall to 51 million tons by 2027, further declining to 39 million tons by 2030.
Production outlook Appalachian basins
Bituminous export prices surged in December 2022 before giving up those gains and more in January as the trans-Atlantic trade declined. With export into seaborne metallurgical markets forming an increasingly larger portion of Appalachian coal demand, the region's aggregate demand is less sensitive to fuel price movements than in domestic producing regions of the Powder River and Illinois basins. The region is also less sensitive to the impact of the growing green energy segment since it ceded a large portion of the domestic steam coal market share over the past several years. Commodity Insights projects 2022 production at 158 million tons, a scant 2 million tons above 2021 levels. Production is forecast to fall in 2023 to 137 million tons and decline further to 128 million tons by 2027. Production is forecast to hold relatively flat after 2027.
Market-indicative coal forecasts produced by Commodity Insights represent forward curves for spot-traded instruments, analogous to a strip of contracts, with the shorter tenors current year, prompt year plus additional years if available driven by the observed/assessed market and the longer tenors typically forecast years three to 20 for physically assessed markers and NYMEX futures driven by fundamental estimates of cash costs of production, accepted returns to capital, regional productive capacity and forecast supply and demand. For the long-tenored portion of the curve, Commodity Insights forecasts prices for specific coal markers and defines the remaining markers via historical spreads.