The Eastern coal industry has begun a long, slow climb out of the recession depths it hit last year, but some parts of it may never be the same again.
Here in southwestern Virginia, where in several counties coal completely dominates the economy, many mines are still working only two or three days a week or are shut down entirely. Much of the coal mined is destined for export or for making coke for the steel industry, and both markets remain deeply depressed.
Demand for steam coal for electric utilities is stirring again, but many of the inquiries coming in are from utility buyers seeking six- or nine-month deals to carry them past a possible United Mine Workers strike when the current contract expires Oct. 1.
Unemployment rates in the seven Virginia coal counties still range upward to nearly 19 percent, and some local officials say the true figures are higher because some unemployed workers have simply stopped looking for jobs that are not there. The statewide figure for January was only 6 percent.
In nearby West Virginia, which was even harder hit by mine layoffs last year, the picture is much the same. Employment gains have been larger, but jobless rates in two coal counties, Wyoming and McDowell, were nearly 23 percent in January.
The National Coal Association predicted last month that U.S. coal exports, which fell sharply last year, probably won't regain their 1982 level of 105 million tons until well into the 1990s. Even then, exports of the metallurgical, or "met," coal, which is used principally in the steel-making process and is the staple of this area, are expected to be lower than in 1982.
About half of 1982 coal exports--52 million tons--moved through Norfolk and other Virginia ports. Last year, such exports through Virginia ports dropped by one-third, to about 35 million tons, under the combined weight of the recession in Europe; increased competition from South African, Polish and Australian coal; higher rail transportation charges, and an extraordinarily high value for the U.S. dollar on foreign exchange markets.
Executives of coal companies in the region, confronted by foreign buyers with threats to buy elsewhere unless prices are lowered, are gloomy about export prospects. They can do little about the value of the dollar or the rail charges, which are now completely deregulated.
And as A. Denny Ellerman, executive vice president of the National Coal Association notes, the price of coal loaded for shipment at the mine is already lower in real terms than it was in 1976.
Some "met" coal prices have fallen between $7 and $12 a ton in the past year to the $35-to-$40 range, depending on the quality of the coal.
"The tonnage is down and on top of that the price is going down," says Eustice Frederick, a senior vice president of Consolidation Coal Co., who oversees mines employing about 2,000 people, less than half the normal Consol work force in the southern Appalachian region.
"Last year was supposed to be the 'survival' year. Get through '83 and it was supposed to get better. Well, I've seen ups and downs but nothing this dramatic. I've never seen both tonnage and prices fall at the same time," he says. "A lot of the smaller operators are waiting it out or they have gone broke. There are a lot of Chapter 11 bankruptcy sales around here."
Other parts of Consol's West Virginia operations, in the northwestern part of the state, produce steam coal for utilities rather than "met" coal, and their production is picking up, company officials say. But the outlook for "met" coal is no better than flat.
Consol's Bishop mine, a 1-million-ton-a-year operation that is its only one in Virginia, is shut down. Another is under development, but there currently is no market for its output, either.
In 1982, West Virginia mines trailed only those of Kentucky in bituminous coal output, producing nearly 130 million tons. Virginia ranked fifth that year, with just over 40 million tons.
Last year, Virginia production fell to between 33 million and 35 million tons, the state's Division of Mines and Quarries estimates, and current levels of production are probably lower than that. Only 634 coal mine licenses have been issued so far this year, down from more than 1,000 in 1982, says Harry Childress of the division's Big Stone Gap office.
Many of the closed mines are small operations whose owners don't have the size or resources of a Consol--a subsidiary of Conoco that in turn is owned by DuPont--and therefore cannot wait out a depressed market.
"You know the small mines are going out," says Michael Quillen, president of Paramount Mining Corp., a former private company now largely owned by W.R. Grace & Co. and Hanna Mining Corp. "It's still a very serious situation here. Most people outside the area are not aware of how bad it is."
Quillen says some mines are again working a full five-day week, including those of Paramount, which employs about 475 people. But that is down from about 600 in 1982, and there is little prospect of any recalls, as a sign at the entrance to Paramount's offices outside this town warns visitors.
The companies that are doing the best in Virginia are those, like Paramount and Westmoreland Coal Co., that in recent years have been able to switch their production emphasis from metallurgical to steam coal. In the last two years, Quillen says, Paramount went from a 65-to-35 split favoring the higher-priced, higher-energy-content "met" coal to a 65-to-35 split favoring steam coal.
"Met coal had always been the most profitable, and we mined the steam coal primarily for cash flow. But the export market for 'met' became so competitive that we just could not compete. We realized that we had to cover more of our fixed costs with utility contracts for steam coal," Quillen says.
Philadelphia-based Westmoreland has made a similar switch over the last seven years, according to spokesman Steve Anderson. Seventy percent of Westmoreland's output used to be "met" coal; now it's 80 percent steam and, bucking the region's trend, production actually rose slightly last year compared with 1982.
The steady payroll of Westmoreland, which employs about 1,700 people at 14 mines in Virginia, including the Bullitt Mine near Appalachia, has propped up the entire economy of that corner of Wise County.
Farther north in towns such as Pound, the squeeze has been severe, while Appalachia and nearby Big Stone Gap have been hurt much less.
B.J. Dotson, president of the Big Stone Gap Bank and Trust Co. and head of Dotson Chevrolet, says, "Basically, how the coal industry goes, so goes the area. Westmoreland has done well and we've had very few layoffs around Big Stone Gap."
As a consequence, sales at his own car dealership did not take a nose dive during the recession, Dotson points out. "I don't mean to say it has been great. It just has not fluctuated like it did nationally," he says.
Not every company has the option to switch from producing 'met' coal to steam coal because of the nature of their coal reserves. Consol's holdings in the area are almost entirely the higher-quality 'met' coal, which carries a premium price because of its higher energy content. It is regarded by its partisans as the "highest quality coal in the world."
However, utilities won't pay that premium to use it in their boilers, and coal companies generally aren't willing to take the loss associated with selling it for that use. Of course, some slightly lower grades of coal can be sold for either use depending on market conditions.
Farther east, in Richlands in Tazewell County, Vernon Reed, chairman of the Virginia Coal Council, also talks gloomily about market prospects. Several years ago, when the world's steel industry was booming, there were sales of Virginia "met" coal on the spot market at more than $80 a ton, he recalls. Now steel is a worldwide disaster, batteries of coke ovens needing "met" coal have been closed because of falling demand and environmental regulations, and former foreign customers have found other suppliers.
"I know one fellow selling coal to Japan for $29.50 a ton," says Reed. "He's selling other coal at higher prices, but he's doing that to kick out a few extra tons. Get 10 people doing that and you've got trouble."
The problem is that coal in Virginia and nearby West Virginia is not cheap to mine. Reed says the average coal seam in the area is only 34 inches high, and it can be expensive to extract.
To cut costs, many Japanese buyers turned to lower grades of coal, particularly from Australia and British Columbia, where they invested in the mines.
"Some of those tons that were lost, it's unlikely they will ever be replaced," Reed says. He cites the example of United Coal Co. of Bristol, Va., which recently dropped a contract with a foreign buyer. "They said they couldn't afford any longer to take the loss."
Reed believes that "down the road, we may have to seek different markets" for the high-quality 'met' coal, perhaps with utilities--for use in new boilers specifically designed to use the higher-energy-content coal--or in other industries. His organization plans a conference on the subject later this year.
A common thread running through all conversations with coal men in the region is anger at the railroads serving the area, Norfolk Southern and the CSX lines. Rates for carrying coal from the area to Norfolk or Hampton Roads and loading it on board a ship generally are about $15 a ton, and the rail lines have refused to cut them in order to try to boost foreign sales.
"The railroads said reducing the rate may not improve the volume. Maybe they are half right," shrugs Reed. "But the coal companies feel they can't continue to take the burden of the full cut in prices."
Says Consol's Frederick, "Somewhere along the way, the railroads have to get the message that we are selling coal under a total price concept" and that a foreign buyer is concerned only with the price he pays for coal delivered where he needs it.
For their part, the railroads maintain their prices are reasonable. Last June, when the Interstate Commerce Commission deregulated rates for carrying coal intended for export, it argued, "The railroads will not be able to price export coal beyond the reach of foreign countries except at ruinous cost to themselves. Because we expect the carriers to act rationally, it simply is not reasonable to forecast a decrease in the amount of coal exported as a result of this exemption."
The National Coal Association's Ellerman says his group's coal demand forecast assumes that a substantial number of the nuclear-powered electric generating plants now nearing completion will come on line during the remainder of the decade, but that, after 1990, most new generating plants will be coal fired. Meanwhile, foreign demand for steam coal will continue to rise, too.
"It's hard to forecast U.S. exports because we really are the residual supplier in that market," Ellerman observes. "In a sense, we are like OPEC. The price of coal out of Norfolk does what the price of Saudi crude out of Ras Tanura does." That is, if another exporter can beat the Norfolk price, he can sell his coal and the U.S. coal industry has to absorb the drop in demand.
South Africa and certainly Poland can undercut the United States in the European market, while a huge mine complex being developed in Colombia by Exxon Corp. will soon be a major new factor.
"Colombia can take over as much of the market as they want," Ellerman says.
An economist by training, Ellerman points out that the industry's real problem is an excess of capacity worldwide. During the 1960s, the industry was "dying" and production capacity shrinking. As a result, prices began to rise and then quadrupled in the wake of the oil price surge in 1974. That year, coal prices on the spot market soared and then were built into the industry's wage structure in the UMW contract negotiated that year.
In addition, new environmental and safety regulations forced the industry to internalize some costs that it had not borne in the past.
Despite the increase in production costs, there were still substantial profits to be made. New investment poured into coal, often from companies and individuals who had no previous association with the industry. Some of the investors brought with them better management tools and new ideas, and grabbed market share away from the old-line companies.
"The newer entrants are knocking out other companies, and there is a lot of turmoil in the industry. The newer mines are more willing to commit production for longer periods and are more willing to vary quantities" in line with the buyers' needs, Ellerman says.
Today, there is a 15 percent to 20 percent excess production capacity that simply rules out any real price increase, he believes.
"You can't find an industry that is more competitive, and there is no shortage of coal reserves to mine. We may have continuing declines in real prices, or constant real prices," he predicts. "The spot market may never revive."
That blunt talk about excess capacity, competition and price prospects is vividly reflected in the continuing economic problems in this part of Virginia. Not only are coal's woes hurting the area, but the very presence of coal makes it all but impossible to bring in other sources of jobs.
Paramount Mining's Quillen is also head of the Duffield Development Authority, a three-county cooperative effort to create an industrial park in Duffield in Scott County. The only companies in the park so far, he says, are coal-related.
Even companies making products for or selling to the industry prefer to locate outside the mountainous coal field area--say around Bristol or Abingdon--where interstate highways are close at hand and flat land does not command astronomical prices. In addition, wage rates for many skilled workers are not influenced by the scales set in the UMW contract. And good housing is scarce, particularly for well-paid executives.
"We are a most restricted, one-source economy, and we're in a struggle down here," Quillen declares.
Adds Vernon Reed, "There are proud people around here, and they are fairly resourceful. But everything is coal or coal-related. If coal doesn't prosper, no business can do well."
Prosperity for coal, at least in Virginia and southern West Virginia, looks to be a long way off.