Cost of mining coal continues to climb


In this file photo, coal lies in piles around a conveyor system at a mine in Kentucky. Coal is deeply linked to the culture and economy in central Appalachia but the industry is facing an expected collapse in production over the next few years. Central Appalachia is where the political fight over the reasons for the coal industry’s woes have been most intense. (Ed Reinke/AP)
October 25, 2012

It’s become common to blame the flagging fortunes of coal mining companies on low natural gas prices that have convinced many U.S. utilities and industries to slash their use of coal.

But there’s another reason for the woes of mining firms: The cost of mining coal has been going up.

Although it’s commonly said that the United States is the Saudi Arabia of coal with more than 200 years worth of reserves, digging up those coal reserves and delivering them to customers has been getting more expensive.

That’s because of rising costs of transportation, explosives, wages — and geology. In most areas, companies first dig coal from areas that are easiest to access and that have the thickest, richest seams. Over time, however, it becomes more expensive to mine — and more difficult to do so profitably.

That’s particularly true in central Appalachia, where the political fight over the reasons for the coal industry’s woes have been most intense.

With a lot riding on the outcome of the election in swing states such as Ohio and Virginia, where some coal companies have announced layoffs and mine closures, GOP presidential hopeful Mitt Romney has been blaming the coal industry’s problems on the Environmental Protection Agency’s regulations on coal-burning power plants.

Indeed, EPA has issued regulations that require new controls at some of the country’s oldest and least efficient coal-fired power plants. And the Labor Department has added safety regulations on mines after workers were killed in some mine explosions.

But some of the higher costs of mining have nothing to do with regulations, many analysts say.

“The issues aren’t mine inspectors and environmentalists. It’s a geological fact of life in central Appalachia,” said Tom Sanzillo, a former senior official in the New York State comptroller’s office and now a financial consultant. “You mine for 100 years and you take a lot of coal. It’s the cost of production. That’s the reality of it.”

Marie Shmaruk, a director at Standard & Poor’s who analyzes metals and mining companies, agreed. “We have been relatively negative on central Appalachia for quite some time because it’s an expensive area to mine,” she said. “It’s been mined out and has thinning coal seams. We’ve been mining there forever.”

Shmaruk said that “central Appalachia is being squeezed the most. At natural gas prices today, the coal in a lot of those mines is not really competitive. And you’re seeing a lot of the utilities in that area have moved to natural gas.”

Coal mining costs are rising much more slowly in the Powder River and Illinois basins, which remain competitive, Shmaruk said. The Powder River Basin, mostly in Wyoming, accounts for 40 percent of U.S. total coal production.

“Is there 200 years [supply] at today’s prices? Probably not,” she said. “But there’s a lot.”

Even in the East, some mining remains competitive. On Wednesday, citing improving market conditions, CONSOL Energy said it would reopen the Buchanan mine in Virginia that produces coal used for metallurgical industries like steel. CONSOL, which has hosted Romney campaign events, had idled the mine just two months ago. It will now recall about 400 of the 600 furloughed workers to return to work Nov. 5.

The National Mining Association says that concerns about exhausting coal mines is overdone.

“The term ‘easy coal’ is really relative to the technology available and being used,” said Carol Raulston, a spokesman for the association. “There is a long history in Appalachian coal mining of every 20 years someone says ‘that’s it.’ And then innovations like long wall mining come along or computer technology ... to enable more efficient mining.”

Raulston said some small mines might not have the money to invest in new technology but companies like CONSOL did. According to Raulston, a decade ago the U.S. Geological Survey said parts of the Pittsburgh coal seam would soon be too difficult to mine, but CONSOL was using long wall mining techniques in that same area today.

But many government agencies are less sanguine.

In its annual energy review this year, the U.S. Energy Information Administration forecast an “upward trend of coal prices [that] primarily reflects an expectation that cost savings from technological improvements in coal mining will be outweighed by increases in production costs associated with moving into reserves that are more costly to mine.”

At a conference held by industry newsletter Platts in September, coal consultant Alan Stagg said, “This is the elephant in the room. No one wants to acknowledge that reserve depletion is profound,” according to a Platt’s coal publication. “Mining conditions are difficult, and the cost to produce is high,” Stagg said. “That is a physical fact. It’s not pleasant. Nobody wants to acknowledge it. That is a fact, and companies that ignore that fact will not do so well.”

One example of a struggling mining company is Alpha Natural Resources, which recently announced that it would close some mines in the Appalachian region and lay off hundreds of workers.

Tucked into its recent earnings release, Alpha Natural Resources said that even in its Western coal mining operations, costs had climbed to $11.01 a ton in the second quarter. Two years ago, costs in that region (acquired from Foundation Coal) were $9.99 a ton, according to company earnings release data.

Ted Pile, a spokesman for Alpha Natural Resources, said that “in the East, typical cost drivers would be ones you might expect in underground mines: rising wage and benefit expenses; rising capital equipment purchase and lease costs; and coal seams that are thinning out as the thicker seams get depleted.”

Pile also said that “more oversight and inspections, plus mounting requirements to purchase new safety equipment are driving up coal costs in underground mines. Technology improves mine safety which is a good thing, but it’s not free.”

The problem of rising costs is a global one.

“Mining costs have risen significantly in recent years – on average by around 9 percent per year since 2005,” the International Energy Agency said in its most recent coal market report.

Coal mining companies are going to need to invest more to produce steady quantities of coal. In its “Coal Information” report for 2012, the IEA said that between 2008 and 2010 it required $7.80 a ton for new production capacity and that those costs would rise to $9.30 a ton going forward.

“Due to strong demand growth, production increased aggressively, causing productivity to decline and increasing mining machinery attrition costs,” said the IEA. “Moreover, with rapid depletion of existing deposits, new mines have tended to move farther away from export infrastructure and thus incur higher inland transport costs.”

Steven Mufson covers energy and other financial news.
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