Coal glut rocks mining companies

by Kris Maher

There's plenty of coal for stockings this year. Despite deep cuts to production, US stockpiles are climbing as supplies outpace demand from utilities and factories.
The glut means miners will have to slash output, compounding the industry downdraft and pointing toward depressed prices and possibly layoffs as miners continue to grapple with uncertainty over climate legislation. Overseas markets can offer a buffer for some miners, however.

Meanwhile, less-expensive coal helps hold down inflationary pressure for customers, which include utilities and steelmakers, and gives the economy the benefit of cheaper power.
Despite a recent slight pickup in industrial activity across the US economy, coal prices remain depressed in the major coal-producing areas, from underground mines in West Virginia to big open-pit mines in Wyoming. The benchmark price for Central Appalachian coal, which makes up 20 % of US production, is roughly $ 54 a ton, down from $ 111 a year ago. The benchmark price for Powder River Basin coal, mostly from Wyoming and accounting for 40 % of US production, is about $ 8.25 a ton, compared with $ 14.50 a year ago. Appalachian coal generally yields more energy than that from the West.

Mild weather this summer and switching by utilities to low-cost natural gas for fuel has contributed to lower coal use. That led to mountains of coal at electricity producers. Coal stockpiles at utilities, the biggest consumers of coal in the US, hit 199.7 mm tons in September, up 37 % from a year earlier, according to the US Energy Information Administration.
Coal companies typically are more comfortable with utilities holding about 140 mm tons, said Kevin Crutchfield, chief executive of Alpha Natural Resources. The Abingdon, Virginia, miner is the nation's No. 3 coal company by production.

This year was the first time in 25 years that utilities coal stockpiles increased during the summer, typically a time of high energy use as consumers run air conditioners. Industrial use fell as well. Utility stockpiles -- which represent about 84 % of coal stored by producers and customers, including steelmakers -- are closely watched because electricity producers drive most coal demand and pricing. Coal executives said they will have to reduce production next year beyond what was cut during the recession.
"Our belief is there will continue to be production curtailments into 2010," Mr Crutchfield said. He said he believes the industry idled 100 mm tons of production this year and could cut 20 to 40 mm tons in the first half of next year.

Smaller, closely held mining companies, especially in Central Appalachia where mining costs are high, are expected to be hardest hit by the downturn. Overall coal mining employment was 79,600 in October, down 7.5 % from a year earlier, according to the Labour Department.
Many coal companies have been insulated by long-term contracts with higher prices, but as those contracts expire, mining companies will face the prospect having to reduce prices.

Mark Clark, finance chief of FirstEnergy told analysts earlier that the utility had about 45 days of coal supplies and was renegotiating contracts to stop deliveries.
"The mining companies would like to deliver the high-cost coal and we would like to not have it delivered. We are trying to work with them," he said.
Some miners have other options for selling coal. Sales of metallurgical coal to steelmakers is beginning to firm and Alpha Natural Resources expects its exports of such coal to Eastern and Western Europe to rise to between 10 mm tons and 12 mm tons next year from 7 mm tons this year.

Demand in Asia also remains strong, though not many US miners can tap that market easily. Peabody Energy, of St Louis, the No. 1 coal producer in the US, said it expects to keep production flat in the US next year but to increase output about 15 % in Australia, which feeds coal to China.
"For us it's really a tale of two markets, between a US market where stockpiles need to be worked down, and where the growth will come in Australia feeding into Asian markets," said Vic Svec, a Peabody senior vice president.

Another factor weighing on coal executives is the potential impact of clean-water rules that could limit low-cost methods of surface mining and increase costs associated with mining and burning coal.
"It's very difficult right now for power generators to build new plants without knowing what the rules are going to be," said Deck Sloan, vice president of government and investor affairs, of Arch Coal Inc., St Louis.