Coal miners underground at a Consol Energy Inc. mine in Pennsylvania look on as a longwall coal machine digs into the coal seam. Consol is among the U.S. coal companies that have found success tapping into seaborne markets for coal.

Source: S&P Global Market Intelligence

Even as coal-fired power plants retired at a rapid pace, total U.S. coal production has held relatively flat since mid-2016 thanks to a boost in coal exports that eased the loss of significant domestic demand.

U.S. coal production hit a low in the middle of 2016 before sharply bouncing back through the second half of that year. Since then, exports have increasingly become a larger segment of the sector, with 2018 shipments surging 19% year over year.

"It's a more significant component of the market than it ever has been," said Joe Aldina, director of U.S. coal research for S&P Global Platts. "Those exports are likely to be fairly durable at least over the next couple years."

In July 2016, about 5.3% of coal produced in the U.S. was exported, according to U.S. Energy Information Administration data. That figure reached as high as 19.1% in April 2018.

"We are seeing an overall shift for the U.S. coal industry away from the declining domestic markets to the growing export markets," said Seth Schwartz, president of energy consultant Energy Ventures Analysis. "Export demand is actually pretty strong for almost all of the U.S. coal products that have the logistics to reach the market."

For years, the U.S. was seen as a swing supplier in global coal markets, stepping in and contributing additional tons when demand boomed or supply became suddenly constrained. Now, seaborne demand is tapping into both the United States' metallurgical coal operations and its excess capacity of thermal coal.

"If this export market of ours cycles down, we're in big trouble, because that coal is not going to have a home in the United States," warned Stephen Doyle, the founder of Doyle Trading Consultants who now runs BtuBaron LLC, at a recent mining conference.

However, metallurgical coal markets have remained robust, Seaport Global Securities LLC analyst Mark Levin wrote in a March 20 note. Despite macroeconomic concerns including a slowing world economy, Brexit and global trade disputes, demand from countries like India and Brazil remains strong while supply-side issues in the eastern U.S. and Australia provide price support by keeping a lid on supply growth.

U.S. coal producers with operations in the Illinois Basin or near the East Coast have found success tapping into new overseas demand, while producers in the larger Powder River Basin have a tougher time getting coal into international markets in recent months.

On a recent earnings call, Hallador Energy Co. cited an IHS Markit report suggesting that for every megawatt of coal generation being retired in the world, mostly in the U.S. and Europe, three to four megawatts are being constructed, primarily in Asia. Arch Coal Inc. executives said despite some pullback in prices, its coal exports are expected to be relatively flat year over year. Peabody Energy Corp., the largest private-sector coal company in the world, expects seaborne pricing to continue supporting U.S. exports.

Alliance Resource Partners LP historically focused on domestic coal sales but recently noted it is planning export volumes 10% higher in 2019 than in 2018 as the company sees its domestic demand holding relatively flat and even falling in the coming years.

The EIA is projecting a decline in coal export volumes from the U.S. over the next two years. Exports of metallurgical coal are projected to drop by 15.6% to 51.9 million tons in 2019 and then decrease to 49.2 million tons in 2020 due to slowing economic growth and decreasing demand for steel, according to the agency's latest short-term outlook. Thermal coal exports are expected to fall by 9.8% in 2019 to 48.8 million tons and then drop to 44.1 million tons in 2020.

Maintaining low costs and flexibility across a diverse portfolio of assets will be key for players in a U.S. coal market that is shrinking and will not allow everyone to survive, said Matt Preston, Wood Mackenzie's research director for North American thermal coal markets.

"[Larger companies that went through bankruptcy already] are also being cautious to not go out on a limb on projects with borrowed money — they would rather see the market [have] tight supply than chase short-term margin," Preston said. "That being said, not everyone will make the right decisions at the right time, and there are still companies with highly leveraged positions. Some will find it difficult to survive an export slump."

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.