Chinese Slowdown Idles U.S. Coal Mines
Wall Street Journal
27 September 2012
By Kris Maher
WHARTON, W.Va.—Slowing growth in China is taking a brutal toll on
Appalachian coal mines and coal towns.
Appalachia has one of the world's richest deposits of high-grade
coal used to make steel. Thanks to Chinese demand, the price for
premium metallurgical coal, whose low-ash and low-sulfur content
makes it ideal for steelmaking, hit a record $330 a metric ton in
Now, the Chinese economy is slowing and so is its steel industry.
That has sent the price of coal used for steelmaking down nearly
50% to $170 a metric ton. Those coal producers who counted on
Chinese sales are reeling.
"When someone had coal to move, China was your big box store,"
said Ernie Thrasher, chief executive of XCoal Energy &
Resources, a major U.S. marketer of such coal to Asia. This year,
"the switch went off."
While many have blamed the downturn in the U.S. coal industry on
cheap natural gas supplanting coal and tougher environmental
regulations, the slide in metallurgical coal demand has been
equally devastating. Coal companies were caught flat-footed after
ramping up production last year with the expectation that steep
prices would cover their rising costs, despite coal's past
cyclicality. Instead, demand in China began to falter just as
Australian metallurgical coal production—interrupted by floods
last year—surged back into the market.
In July, Patriot Coal Corp. of St. Louis filed for bankruptcy
protection, shortly after it lost a contract for coal bound for an
Asian steelmaker. Patriot's stock slid 18% the day after it
announced that news, taking other coal stocks down with it.
Earlier this month, Patriot said it would temporarily idle
metallurgical coal operations at three mining complexes in
southern West Virginia and lay off 250 miners, in addition to
1,000 layoffs earlier this year. On top of that, Patriot has said
it will need to reduce "unsustainable" pension and health benefits
to 2,000 miners and some 20,000 retirees and surviving spouses.
Members of the United Mine Workers of America Rallied in West
Virginia on Tuesday 9/18 to demand the court venue for the
bankruptcy case of Patriot Coal be moved to West Virginia from New
York. WSJ's Kris Maher reports via #WorldStream.
China's metallurgical coal imports dropped to 2.6 million metric
tons in August, from an average of 4.5 million metric tons per
month through July. Now coal mines are closing throughout
Appalachia. Earlier this month, Alpha Natural Resources Inc., of
Bristol, Va., which derives a large share of its profits from
metallurgical coal, said it was cutting 1,200 jobs, or 9.2% of its
workforce. Earlier this year, Alpha laid off more than 700 miners
and trimmed production at more than 20 mines. Consol Energy Inc.
of Pittsburgh, which sells more coal into China than any other
U.S. producer, earlier this month idled the nation's biggest
metallurgical coal mine, which employs 620 miners. Arch Coal Inc.
trimmed its metallurgical coal production estimate by 21% this
Miners like Phillip Powell, 38 years old, of Wharton, have been
swept up by the collapse. "A lot of guys that I worked with are
scared of losing everything they own," said Mr. Powell, who was
laid off in March from a section foreman job at a Patriot
metallurgical coal mine. Mr. Powell said he sees no chance of
finding another job that would come anywhere close to paying the
$108,000 he earned last year. After 17 years in mining, he plans
to go back to college to get certified to teach physical
Appalachian coal industry executives had been counting on
metallurgical or "met" coal—which is sold at a premium to
steelmakers—to offset the dwindling market for lower-grade thermal
coal used by power plants. The thermal coal market has been
weakening because utilities are buying cleaner-burning natural gas
instead. Natural-gas prices have plummeted as energy companies
used hydraulic fracturing to extract gas from vast shale
In April, natural gas and coal each fueled 32% of the nation's
electricity, achieving parity for the first time in the decades
that the Energy Information Administration has tracked the data.
For decades, coal powered about 50% of the electricity to the
nation's businesses and homes.
Metallurgical coal exports were supposed to fill the gap. Only a
year ago Patriot was posting record revenue and operating earnings
and embarking on a plan called the "Met Built-Out" to open new
metallurgical mines and hire up to 200 new miners.
Other coal companies were buying rivals to strengthen their
metallurgical coal operations and reserves. Four publicly traded
U.S. coal companies made acquisitions in North America totaling
$14 billion in 2011, the largest being Alpha's $7.1 billion
purchase of troubled Massey Energy.
Alpha now has 1.5 billion tons of metallurgical coal reserves, and
the ability to export up to 30 million tons a year. It is hoping
to weather the weak market by being the low-cost producer of
premium met coal. "While it's a bit soft now, we have a very
valuable metallurgical coal franchise, and we're hitching our
wagon to it," said Alpha Chief Executive Kevin Crutchfield.
The cost to pull a ton of coal out of the ground varies widely
from mine to mine based on geologic conditions and the degree of
automation. In Appalachia, average mining costs are about $65 to
$75 per ton. A ton of thermal coal is currently selling for $52 a
ton on the spot market, making it impossible to operate some mines
at a profit.
Before the China steel market took off, metallurgical coal was
valued much like thermal coal and was often sold to power plants
where it was burned like lower-grade coals. "It was like using an
expensive bottle of red wine to make spaghetti sauce," said Paul
Forward, an analyst with Stifel, Nicolaus & Co.
That changed with China's industrial boom. Up until 2004, the
price for metallurgical coal stayed below $40 a ton in the U.S.
Prices hit an all time record of $330 a metric ton in the second
quarter of 2011 after flooding in Queensland, Australia, disrupted
coal supplies headed for China.
China couldn't seem to get enough metallurgical coal to feed its
steelmaking industry. In 2009, U.S. met coal exports to China grew
nearly six-fold, and grew by the same rate in 2010, linking
Appalachia more closely to the global steel trade.
Now the China spigot is closing. The Chinese steel industry—which
consumes half of all metallurgical coal mined each year—faces the
possibility it could operate at a loss in 2012 for the first time
as a result of overcapacity and weak steel prices, according to
the China Iron & Steel Association. That would mean tougher
times in West Virginia, where rail, barge, trucking and other jobs
depend on coal.
Write to Kris Maher at firstname.lastname@example.org