US steam coal is showing signs of improvement, with inventories continuing to trend lower, producers maintaining production levels below normalized demand, and the short-term weather outlook favoring increased heating demand, according to a research note from FBR Capital Markets, released Friday.
"We expect year-end inventories to be at the lowest level since 2008 and also expect an additional 24 [million short tons] deficit in 2014 as the producers remain committed to idled production with limited incentive to restart capacity," the report said.
According to the latest stockpile data from the US Energy Information Administration, released Wednesday, total stockpiles held by the electric power sector totaled 153.8 million st in September. The aggregate stockpile has fallen by 31.1 million st, or 16.8%, since December 2012.
Broken down, bituminous coal stockpiles totaled nearly 73.1 million st in September, sub-bituminous coal totaled 75.3 million st and lignite totaled 5.5 million st.
Powder River Basin coal accounts for about 95% of the sub-bituminous stockpile data.
In 2008, end-of-year stockpiles totaled 161.6 million st, including 65.8 million in bituminous coal and 91.2 million in sub-bituminous coal.
With respect to the PRB coal market, FBR said, "While some investors believe that about 50 [million st] to 70 [million st] of idled capacity in PRB could be restarted easily, we think producers may be reluctant to do so given (a) smaller hedged position for 2014 coal (than historical), (b) the need to balance mine reserve life given replacement (LBAs) is no longer economical, and (c) the maintenance requirements of equipment that might have been idled a while ago."
According to FBR, PRB producers as of Q3 2013 are on average about 83% contracted out for 2014 compared with about 89% on average between 2010-2012. Arch Coal, Alpha Natural Resources, Peabody Energy and Cloud Peak Energy were the four publicly traded companies included in the tally. FBR has raised its 2014 price for PRB coal to 12.50/st from $12/st, while prices in the other coal basins remain unchanged. Central Appalachian coal for 2014 remains unchanged at $57.50/st, NAPP coal at $60/st, and Illinois Basin coal at $45/st.