Powder River Basin coal demand could fall between 1 to 3 percent per year, according to one of the basin’s largest producers, Arch Coal.
Paul Lang, Arch president and COO, said higher quality coal in the basin is expected to fare better than the 8400 market.
He made the comments during Arch’s first quarter earnings call with investors Tuesday, when the firm reported $555 million in revenue for the first three months of the year, its trouble in the Powder River Basin due to flooding, its record cash per ton from its metallurgical coal segment and its continued effort to return millions of dollars in earnings — $726 million since early 2017 — to its shareholders through buybacks and dividends.
The Powder River Basin portion of Arch’s business was down both in volumes and the amount of cash made from each ton of rock, minus the cost to mine it, year over year.
Arch made $12.18 per ton on coal but spent $10.98 to mine each ton in the first quarter of this year. That margin per ton of $1.20 in the Powder River Basin is down from $1.38 in the first three months of 2018. Those margins are in keeping with the company’s mid-range expectations for the year of $1.10.
In terms of the outlook of Wyoming’s coal sector — which makes up the bulk of the Powder River Basin coal sector — Lang was fairly blunt.
“I think we have what I’d call a sober view of the PRB,” Lang said, noting the mixed sucess of the different value coals. “But it’s a great story as far as cash generation, but I just don’t see any expansion or any growth possible out there.”
Wyoming coal has faced considerable headwinds in recent years, from the bankruptcy period of 2015 and 2016, when Arch was among the large players to declare bankruptcy, to the ongoing bleed of customers for Wyoming coal as power plants across the country shutter.
Arch, like other large players, continues to rely on the growth and health of the metallurgical coal market to offset declines and flatlines in the Powder.
Production volumes out of Arch’s Powder River Basin mines — Black Thunder and Coal Creek —- will likely be lower than the first quarter, Lang said in the earnings call Wednesday.
“PRB, it’s a little bit of a moving target,” he said. “I think Q2 will be slightly worse than Q1, but I don’t think it’s going to be much below that.”
The second quarter of the year is usually the lowest production quarter for Wyoming coal as a shoulder season between winter and summer demand. Due to flooding in the Midwest interrupting rail access out of the Powder, the second quarter for Arch will likely be affected, the company noted in its earnings release.
In response to a question Wednesday regarding the low natural gas price effect on demand for Powder River Basin coal, Arch Coal’s Deck Slone, senior vice president for strategy and public policy, said it was a constant battle, but reiterated that the company had had a strong first quarter.
“We are seeing good, solid demand really across the board from various operations but particularly in the PRB,” Slone said. “And we’ve seen higher levels of activity in Q1 than we’ve seen in the past five years, so clearly the fact that stockpiles have come down to now close to target levels is helpful.”
Slone said despite the gas challenge, the company felt like demand was “quite solid and stable.”
Arch Coal has chosen to scale back in the Powder River Basin over the last few years, reducing its mid-range expectations of production to keep pace with the demand. It’s also shifted its focus to Black Thunder, one of the largest surface mines in the country, over its operations at Coal Creek — a lower quality coal that’s a bit more expensive to get out of the ground.
As noted by Lang in the earnings call, lower heat coal operations in the Powder appear to face greater challenges than higher quality assets, but experts note that both the higher- and lower-heat coal markets face challenges.
A recent report from Moody’s Investor’s Service noted that the outlook for the Powder River Basin is difficult but consolidation of operations, which would pull supply more in line with weaker demand, is unlikely at this time, the Moody’s analysts noted.