The pure play Powder River Basin coal operator, Cloud Peak Energy CLD, announced that its unit Cloud Peak Energy Logistics LLC has entered into an agreement with BNSF Railway Company, keeping in mind the softness in coal demand in the international markets. The new agreement will disregard the volume obligation arrangement that both parties had agreed upon earlier for the period 2016 through 2018 in exchange of a series of payments.
Conditions of New Agreement
Per the revised agreement, Cloud Peak Energy made an upfront payment to BNSF Railway and has the right to make payments from 2016 through 2018 replacing the previous take-or-pay commitments during this three-year period.
The new agreement is primarily to address the softness in coal demand in the international markets, particularly from China. In addition, the stronger U.S. dollar is making Australian and Indonesian coal more attractive to the Asian importers.
Transportation Contracts – A Key to Success
Long-term volume contracts are a common practice among coal producers and railroad operators. Finding a railroad partner to transport the produce from mining regions to end consumers is crucial for the success of coal miners.
Cloud Energy was forced to revise its prior contract on lower-than-expected international demand. However, the parties will continue to meet at regular intervals to evaluate market conditions and discuss potential shipments along with the terms for any shipment.
Weak International Coal Demand
Per the latest release of the U.S. Energy Information Administration (EIA), sluggish coal demand and lower international coal prices have led to a decline in U.S. exports. The report predicts coal exports to fall by 18 MMst (19%) to 79 MMst in 2015, and then decrease by another 7 MMst (9%) in 2016 as the current global coal market trend continues.
The softness in coal exports is also affecting other large operators in the space like Peabody Energy BTU and Arch Coal ACI.
U.S. Coal Demand Wanes
The overall condition of the U.S. coal market is succinctly summed up by Peabody Energy’s observations. The company expects 2016 utility coal consumption to be below 2015 levels based on current natural gas prices and expected coal-fired plant closures. The Clean Power Plan of the Environmental Protection Agency will ensure a drop in domestic demand for coal in the U.S.
It is not only lower volumes but a corresponding drop in coal selling prices per ton that is hurting the coal miners. CONSOL Energy’s CNX contribution from coal sales in the reported quarter declined primarily due to lower selling prices from its Pennsylvania and Virginia operations.
Zacks Rank
Cloud Peak Energy currently has a Zacks Rank #3 (Hold).
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