Several coal industry officials who addressed a conference Feb. 23 in Denver said that history has taught them to be skeptical about industry boom cycles.
Alan Stagg, who heads West Virgina-based Stagg Resource Consultants, recalled the coal boom of 1974. He also remembers that it took decades to wring out the excess mine capacity that came online and cure many of the bad habits that resulted from that brief boom period.
Stagg told the EUCI conference on volatile coal markets that he sees many parallels between then and now.
Currently Eastern spot prices are going through the roof. Some urgent buying of Eastern compliance coal on the spot market can run $65 per ton. Metallurgical coal can command $100 per ton in some cases.
On top of that, plans for dozens of coal-fired power plants in the United States have been announced. Natural gas prices also remain high enough, at least for the short term, to keep from exerting any downward pressure on coal prices, said Trygve Gaalaas of Pace Global Energy Services.
So why are coal consultants and producers getting nervous? For starters, the rate of new coal-fired generation actually being built is not keeping pace with the growth of new electric generation in general, said PA Consulting Manager Jerry Eyster.
While these unusually high tonnage prices are good for coal suppliers in the short term, they could scare off potential investors in coal- fired generation, Eyster warned. Sulfur dioxide credits needed for unscrubbed coal plants are already a prohibitive $500 per ton, Eyster noted.
In addition, the coal industry is facing dwindling coal reserves in Central Appalachia and rising costs at virtually every turn. While numerous speakers at the conference said they doubt Eastern coal sales prices will plummet to the mid-$20 range of a few years ago, they do expect today’s high prices will not last.
Several speakers wondered if mine operators will be able to get their expenses under control when prices fall. Railroads and product suppliers are using the high coal prices as an impetus to raise their own fees. Some local governments are even looking to cash in on the current good times by raising severance taxes.
The prices of everything from roof bolts to raw materials are going up, several officials said. Due to retirements, Appalachia is facing such a severe manpower shortage that much of the next generation of U.S. miners could speak Spanish as their first language, a couple of speakers said.
For example, Massey Energy spent millions of dollars accumulating new reserves in Central Appalachia but has struggled to develop them because of labor constraints, Stagg said. He cited a popular “urban legend” that one coal company advertised for miners by using a small plane to fly a “Help Wanted” banner over Myrtle Beach, S.C., a popular vacation spot for residents of Central Appalachia.
The turnover from veteran miners to less experienced crews means that miner productivity is falling for the first time in years, officials said.
It is now more expensive and time consuming to get mines permitted, Stagg said. Kentucky’s crackdown on overweight coal haul trucks has probably added a couple of dollars of expense onto each ton of coal there, Stagg said.
Even the mammoth mines in Wyoming’s Powder River Basin have their share of problems. These include railroad bottlenecks that make it more difficult to move their coal eastward and increased “stripping ratios” at the surface mines. The latter means that the operators must remove larger portions of overburden to reach the coal.
Stagg also worries that there is no real industry standard for accurately measuring the amount of economically recoverable coal reserves owned by a given company. This will become a bigger issue as more coal companies go public and must report to shareholders.
In the petroleum industry, Stagg noted that Royal Dutch/Shell got into trouble with shareholders about the actual level of its reserve base. “It could happen in our industry,” Stagg said.
