Coal production will keep falling next year in the midst of reduced demand in an energy landscape that keeps shifting, according to an industry outlook report from Moody’s Investors Service released Monday. Coal-fired power generation could fall to a third of the U.S. mix as natural gas prices stay below historical levels.

Moody’s summarized the problem in the title of its report, “U.S. Coal Producers Face Tough 2013 Amid Long-Term Shift in Energy Infrastructure,” noting that continuing falling demand in coal’s biggest market — electric utility generation — is the primary cause.

“We expect coal to regain a little market share as natural gas prices recover, but most coal-to-gas substitution will be permanent,” said one of the report’s authors, Ana Zubets-Anderson, a senior analyst at Moody’s. The decline in coal production will continue into mid-to-late 2013, Zubets-Anderson said.

Moody’s report predicts that during the next decade coal’s share of the electricity fuel mix, which has historically stood at about 50%, “will likely fall” to roughly a third, citing recent market share declines in Central Appalachia as likely being permanent. “That’s a distinct challenge for producers Arch Coal and Alpha Resources, among others,” the rating agency said in its report.

Moody’s said fuel switching has likely reached bottom, but the current fuel mix de-emphasizing coal is “here to stay.” The report notes that the U.S. coal and power industries “have long depended on each other, but the relationship has begun a permanent shift at coal’s expense.”

Noting that gas prices have rallied up to the $2.75/MMBtu level in August after falling below $2 in April, Moody’s said that gas prices “will remain low by historical standards in the medium term” ($3-3.50/MMBtu). Price and emissions advantages make natural gas the “fuel of choice” for power generators, Moody’s said.

There is only a “limited potential” for a reversal of the current trend away from coal in the next 12-18 months, Moody’s said.

“We believe that over the next three to five years coal’s share of power production will bottom out near the 38% level that the U.S. Energy Information Administration predicts for 2013,” said Moody’s, concluding that most of the power sector’s coal-to-gas switching has already taken place.

Among the negative pressures on the coal industry, according to Moody’s, are U.S. Environmental Protection Agency emissions regulations covering mercury and toxics (MATS standards), along greenhouse gas carbon emissions. In the face of this, coal consumption the first half of this year “plummeted and stockpiles grew,” leaving generators to attempt to defer coal shipments scheduled under long-term contracts, Moody’s said. Coal producers have found it tough to sell any uncontracted volumes.

“We expect a further 3-6% decline in coal production in 2013 as power producers attempt to work off excess inventory and miners rationalize supply,” Moody’s said.

Two longer term mitigation possibilities for the coal industry involve increased coal use in steelmaking globally and U.S. exports of coal. Neither are near-term possibilities, however, Moody’s said.

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