Shortage of Miners, Investment Makes Output Boost Tough By KRIS MAHER June 24, 2008; Page A4
U.S. coal producers have been largely unable to meet growing demand because of a lengthy permitting process, lack of capital investment and a shortage of skilled miners, which will keep supplies tight and prices high.
The underlying industrywide issues are compounded by severe floods in the Midwest, which have stranded barges full of coal and submerged railcars used to haul coal. It isn't clear what impact those interruptions will have on supplies and prices.
Paul Forward, a coal analyst with Stifel, Nicolaus & Co., expects demand for coal in the U.S. to outstrip supply this year by 15 million tons, in large part because of the increase in exports, which shot up 49% through April compared with last year. Constraints to production also played a role in the growing shortfall, he said.
Limited Supply Response
"Despite the strong margins that coal companies are seeing, the supply response has so far been limited," said Mr. Forward. "I think it's probably a couple years worth of time where these markets stay tight."
Up to 40 million tons of potential and anticipated coal production is being held back because of delays in obtaining environmental permits and new safety regulations, estimates David Khani, director of research at FBR Capital Markets Inc. in Arlington, Va.
While 40 million tons doesn't seem significant given that the U.S. produced 1.15 billion tons of coal last year, even small shifts in supply can have a big impact on price. The reason, analysts say, is that a large percentage of coal supply is tied up in multiyear contracts, so there is little slack to make up for production shortfalls. That could force some utilities to buy coal at current high spot-market prices and pass some of those costs on to consumers.
"People are going to get sticker shock when they open their electricity bills this summer and next summer," said Mr. Khani. Price increases will depend on rules in individual states and on the hedging strategies of utilities.
The Midwest flooding is expected to further tighten stockpiles, by taking several million tons of coal offline, said Vic Svec, a senior vice president at Peabody Energy Corp., in St. Louis, the world's biggest coal producer. Peabody expects to produce between 235 million and 245 million tons of coal this year, compared with 238 million tons produced last year. Roughly 10% of that production is high-quality coking coal in Australia.
The supply constraints are most acute in Central Appalachia, which accounts for 25% of the coal mined in the U.S. but has a greater impact on market conditions because coal from the region generates more heat per ton than coal from other areas like the Powder River Basin in Montana and Wyoming.
The spot price of Central Appalachian coal sold to both utilities and steelmakers has tripled in the past year, with coal going to utilities rising to as much as $140 a ton from $44 a ton, and that destined to steelmakers to $300 a ton, from $100 a ton. Coal production in the region declined 2.3% through early June compared with the same period last year, according to an analysis by Mr. Forward of Stifel, Nicolaus of U.S. Energy Information Administration data.
Hard to Increase Output
"In general it's hard in the short run in our business to dramatically increase production," said Thomas Hoffman, a spokesman for Pittsburgh-based Consol Energy Inc., the nation's fifth-largest coal company by production. "It's not like we have a bunch of idle production and we can just turn a key and out it flows like water through a pipe." Consol, which operates 16 mines in Appalachia and one in Utah, is hoping to boost production 10% to 70 million tons this year.
Industry officials say high operating costs are deterring small operators from opening mines to take advantage of high prices and help relieve supply constraints. Even big companies face higher costs associated with safety regulations and the inability to get enough mine workers. Massey Energy Co. said the biggest challenge to its plan to increase production by up to 9% this year is its ability to find and hire 300 to 400 new miners.
Dan Roling, chief executive of National Coal Corp., of Knoxville, Tenn., which operates mines in the Southeast, said the mining industry was reluctant to buy new machinery and develop new mines when prices were lower. "Until these higher prices [arrived], the industry has not been investing," he said.
As a result, mining companies aren't able to take full advantage of the strong demand.
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