Thermal coal earnings to improve on greater consumption in 2021: Moody’s Investor Services

Thermal coal producers’ earnings are expected to improve in 2021 with domestic coal consumption forecast to increase between 5% and 10%, Moody’s Investor Services said. While the expected improvement should aid producers in modest debt reduction, secular demand will persist over the next few years, “straining credit quality for thermal coal producers and intensifying ESG-related risks that diminish their access to capital,” Moody’s said.

Across all grades of coal, Moody’s projects production will rebound to 550 million-575 million tonnes in 2021, up from a previous forecast of 525 million-550 million tonnes.

According to the report, Moody’s forecasts are more conservative than the Energy Information Administration’s, which expect annual output of approximately 581 million tonnes. Additionally, Moody’s expects less power generation demand than the EIA’s forecast of 550 million tonnes in 2021.

“Given the expectation that production will increase only modestly, we expect some mines that were idled due to weak market conditions in 2020 will not restart production in the near term,” the report said.

Increasing economic activity, particularly in China, will support seaborne thermal demand. Plus, “lower coal imports by China from Australia as a result of geopolitical tensions benefit coal producers in countries such as Indonesia, Russia, Mongolia, and the United States,” Moody’s said.

In 2021, Moody’s projects thermal exports of 30 million tonnes-35 million tonnes, up from the EIA’s estimated 27 million tonnes in 2020.

Freight rates remain a concern, as well, for export markets “both as demand recovers near-term and as railroads continue to move away from coal over a longer horizon,” the report said. Regarding consolidation, Moody’s anticipates minimal to modest levels of it among thermal producers despite the ongoing decline in demand.

“The industry has limited access to capital that helps facilitate M&A transactions, with public companies controlling much of the industry’s production, and ESG-related issues making it more difficult for producers to pursue consolidation deals in light of substantive environmental liabilities and the need to obtain capital to complete deals,” the report said.

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