Bloomberg News

Appalachian Coal Fights for Survival on Shale Boom: Commodities

March 21, 2012

Coal mining in Appalachia has survived deadly explosions, the Great Depression and the country’s largest armed insurrection since the Civil War. The latest threat is booming shale-gas production.

U.S. power utilities are favoring natural gas, which is trading at its cheapest in a decade as hydraulic fracturing opens up previously inaccessible reserves. Consumption of coal to generate electricity will fall 5 percent in 2012 to less than 900 million tons, a 16-year low, according to the U.S. Energy Information Administration.

Mining companies in Appalachia, an area covering 12 eastern states and home to 85 percent of U.S. coal mines, have cut at least 21 million tons of production this year, according to Doyle Trading Consultants in New York. The industry needs to curtail about another 90 million tons nationwide, with the “lion’s share” coming from Appalachia, to stem losses, according to CRT Capital Group LLC. Alpha Natural Resources Inc. (ANR) and James River Coal Co. (JRCC), which mine in the region, have fallen 18 percent and 14 percent respectively this year.

“A lot of the marginal producers in Appalachia that were able to hang on in 2009 are in a much worse situation today,” Kuni Chen, an analyst with CRT in Connecticut, said in an interview.

Average operating costs now exceed coal prices for the first time in three years, according to data compiled by Bloomberg Industries. Appalachian coal, the U.S. benchmark grade, fell 28 percent in the past 12 months. Coal futures closed 0.4 percent lower at $61.75 a ton on the New York Mercantile Exchange yesterday.

Rising Costs

So-called mining cash costs in the region climbed 9.2 percent to $60.28 a ton in 2011, according to data compiled by Bloomberg Industries.

Gas futures in New York have tumbled 51 percent in the same period. Gas inventories were 51 percent above their five-year average on March 9 as surging production combined with the warmest winter in 10 years, according to data compiled by Bloomberg Industries.

For U.S. power utilities, who consumed 90 percent of the country’s coal production in 2010, the prospect of relatively cheaper gas supplies now and in the foreseeable future has pushed them to switch some of their generation to gas-burning plants from units that use coal.

Gas for April delivery rose 1.1 percent to $2.36 per million British thermal units at 2:30 p.m. in New York. Gas futures traded at $2.204 per million Btu on March 13, the lowest intraday price since Feb. 15, 2002. Gas is down 22 percent in 2012, the worst performer on the Standard & Poor’s GSCI Commodity Index.

Commodity Prices

“Power prices are in the tank,” said Gordon Howald, a utility analyst with Doyle Trading Consultants in New York. “In this environment, nobody’s building anything but natural gas,” he said, referring to power-plant construction.

U.S. coal companies have faced slumping commodity prices before. Coal prices declined in 2009 after the financial crisis led to a recession. U.S. coal production fell 8.3 percent that year, according to data from the U.S. Department of Energy.

Appalachian output dropped to 270 million tons in 1932 from a peak before the Great Depression in 1926 of 500 million tons, according to data from the U.S. Geological Survey. In Pennsylvania, home to U.S. Steel and Bethlehem Steel, production plunged 54 percent in the period, the data show.

Mine Explosions

The region’s coal industry recovered from earlier crises. In 1921, police and troops helped put down a revolt near the town of Matewan by thousands of West Virginian miners seeking to unionize, according to the Friends of Blair Mountain, an activist group seeking to preserve the area.

More recently, safety has become a focus. Coal-mine explosions have killed 59 miners in West Virginia, Alabama and Kentucky since 2001, according to data from the Mine Safety and Health Administration, part of the U.S. Department of Labor. In April 2010, 29 miners died in a blast at Upper Big Branch, a Massey Energy Co. mine in West Virginia.

Alpha, which completed its $7.1 billion takeover of Massey in June, in December agreed to pay $209.3 million to end a criminal investigation and civil proceedings related to the explosion.

Producers in the region face challenges that didn’t exist in the last downturn in 2009. Inventories of the fuel held by domestic customers will soar to a 10-year high at the end of 2012, according to Doyle Trading. Mining companies also can’t rely on sales to foreign steelmakers to compensate as prices for those exports have declined.

Export Demand

Metallurgical coal, a premium coal variety used that in the U.S. is mined almost entirely in Appalachia, is used in steel blast furnaces. The raw material is typically more profitable than thermal coal sold to power stations. Steelmakers outside the U.S., who purchase about 72 percent of the country’s output of metallurgical coal according to the EIA, may buy this year at a slower rate.

Goldman Sachs Group Inc. dropped its estimate for growth in steel output in China, the biggest producer of the metal, to 2 percent from 6 percent. Andre Benjamin, a New York-based analyst at Goldman, said in a March 18 note that prices for U.S. metallurgical coal may fall to $175 a ton in 2014 after touching $225 this year.

Environmental Rules

Mark Levin, an analyst at BB&T Capital Markets in Richmond, Virginia, predicts metallurgical coal exports will fall to 61 million tons in 2012 from a record 69 million tons in 2011.

“It’s simply hard for us to imagine 2012 U.S. met exports being anywhere close to 2011 levels,” Levin said in a note yesterday.

Meanwhile, the U.S. Environmental Protection Agency is proposing the Cross-State Air Pollution Rule to cap sulfur- dioxide and nitrogen-dioxide emissions. Coal-fired power plants account for most of those two pollutants, according to the EPA.

“That has really put a chill on utility buying,” Peter Socha, chief executive officer of James River, said at an industry conference on March 6.

Appalachia will produce 322 million short tons of coal in 2012, a 5 percent decline from last year, according to an outlook published March 6 by the EIA.

James River and other Appalachian coal producers -- Alpha, Patriot Coal Corp. (PCX) and Arch Coal Inc. (ACI) -- are the worst- performing U.S. members of the Stowe Global Coal Index (COAL) so far this year.

Alpha Cuts

Alpha, which gets most of its revenue from Appalachia, said Feb. 3 it expects to reduce output by about 2.5 million tons a year of thermal coal and 1.5 million tons of metallurgical coal because of “adverse” market conditions. Analysts have widened their projected first-quarter loss for the company by 90 percent in the past 10 days to 1.9 cents a share, according to estimates compiled by Bloomberg.

Rick Nida, a spokesman for Alpha, and Janine Orf, a spokeswoman for Patriot, didn’t immediately respond to requests for comment. Consol will keep monitoring demand and respond accordingly, Lynn Seay, a company spokeswoman, said in an e-mail yesterday.

Arch will maintain its timetable for developing its metallurgical-coal projects including Tygart Valley in northern Appalachia, Kim Link, a spokeswoman, said in an e-mail yesterday.

To contact the reporter on this story: Sonja Elmquist in New York at selmquist1@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net


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