Annapolis/Edinburgh, July 22, 2009 – Significantly lower US coal demand coupled with the economic recession requires cuts of a further 50 million short tons (Mst) in US coal production in order to balance demand according to Wood Mackenzie’s revised outlook for the industry. Furthermore, the independent energy research firm said the Central Appalachian (CAPP) basin’s decline will be accelerated by the economic downturn in favour of lower cost Powder River Basin (PRB) and Illinois Basin (ILB) coal supplies.

Matt Preston, Principal North America Coal Analyst for Wood Mackenzie said: “Across the major US coal producing regions, among the most prolific and efficient in the world, producers are facing a significant reduction in demand, which could be as much as 121 Mst in 2009 (or 11% of total US thermal production). Of this, we attribute 20 Mst to an excess of stockpiles, 28 Mst due to gas competition, but the majority of the reduction demand – 73 Mst – is a direct impact of the economic recession.”

Preston continued: “The boom in coal prices over the last two years saw Central Appalachian producers struggling to increase production, while those in the Powder River, Northern Appalachian and Illinois basins were planning major expansions of as much as 100 Mst for 2009. However, due to the world economic downturn, low gas prices and high stockpile levels, our analysis shows the industry has already responded with announced cutbacks of 66 to 84 Mst for 2009. We believe another 50 Mst needs to be cut in order to achieve some measure of equilibrium.” 

The region bearing the brunt of these declines is Central Appalachia, which will see the most significant collapse in demand in 2009. Preston explained: “We previously projected declines in the demand for CAPP coal as a result of easing international demand and coal switching associated with the scrubber build out of about 60 Gigawatts (GW) of coal-fired capacity.  We now add to that the recession-related fall in electricity demand, competition from natural gas – which will further erode CAPP demand by as much as 10 Mst in 2009 – as well as steeply declining demand from the industrial sector. This equates to a reduction in projected output from 235 Mst in 2008 to just 190 Mst in 2009 – the greatest drop in production across all the US coal regions.

“Central Appalachia has already faced a host of obstacles including reserve depletion, high production costs, permit issues, reduced productivity (and production) due to the MINER Act of 2006, labor shortages and access to capital. These factors combined with reduced demand are greatly accelerating the basin’s decline.  Even with some utility companies reluctant to switch to PRB and ILB supplies and the postponement of some scrubbers, we forecast CAPP production will continue to fall for the foreseeable future.” 

The size of the economy, as measured by Gross Domestic Product (GDP), is correlated to electricity demand and industrial output – both important factors in determining coal demand. Wood Mackenzie has revised its outlook to reflect a much greater, negative impact of the recession on GDP: “We now forecast the US economy, as measured by GDP, to shrink 2.9% in 2009 with little recovery in 2010. As a result, electricity sales are forecast to decline such that we do not expect the absolute amount of energy sold (in kWh) to return to 2008 levels until 2013.  Industrial output, and related coal demand, will also shrink. The global nature of the recession means that international demand for US thermal coal will also decline.” 

Further adding to the impact of the downturn on US coal are lower domestic natural gas prices which Wood Mackenzie forecasts will remain between US$4 and US$6/mmbtu in nominal terms until 2014. This has greatly increased the competition between coal and gas-fired generating units: “The combination of lower electricity demand and low gas prices, backed up by significant gas supply, have led coal markets into uncharted territory with excess supply and declining demand.”