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Oversupply and shut down costs adding to coal industry woes
April 2, 2015

A report from

Bloomberg

on April 2, noted that the coal industry is not only struggling with depressed prices, but is also facing an oversupplied market.

One of the reasons for the oversupply is the cost to close and reclaim a mine site.

The report notes that because of cost associated with shuttering an operation companies are opting to take a small, steady loss by continuing work rather than one big writedown, in the hope that prices will bounce back. That, of course, is only adding to the supply glut in the United States, the world’s second-biggest producer, and driving prices down further.

It’s become, in essence, a trap for miners.

“You have this really perverse situation where they keep producing,” James Stevenson, director of North American thermal coal at IHS Inc. in Houston, said. “You’re just shoveling coal into this market that’s oversupplied.”

Morgan Stanley told Bloomberg that companies will dig up at least 17 million tons more coal than power plants need this year. Coal is burned at the plants to generate electricity. That’s creating the latest fossil fuel glut in the U.S., joining oil and natural gas.

The fuel’s share of the electricity market has dropped to 37 percent from about half in 2007, government data show.

A year ago, exports and higher natural gas prices offered some hope. Now, a strong dollar makes U.S. coal too expensive for overseas buyers and an oversupply of shale gas is stealing domestic market share. Benchmark European and Australian prices are the lowest since 2007. Prices in the U.S. will average $52.32 a ton this year, down 9.1 percent from $57.54 in 2014, based on the median of seven analyst estimates compiled by Bloomberg.

Central Appalachia coal has fallen four straight years on the New York Mercantile Exchange. Even after a rally in February, prices are the lowest for this time of year since 2009. Meanwhile, gas is at the second-lowest seasonal level in the past decade.

About 72 percent of coal from West Virginia, Kentucky and Virginia, the states that make up Central Appalachia, is mined at a loss.

It’s partly the result of a 1977 law that requires companies to reclaim closed mine sites. That includes restoring grasslands, removing waste water and sealing the mine shafts.

So while a 4 million-ton-a-year mine in Central Appalachia, which has the nation’s highest coal costs, may lose $15 on every ton, the one-time expense to permanently close it could reach as much as $44 million, according to Wood Mackenzie Ltd.

Alpha Natural Resources Inc., the second-biggest U.S. coal producer by sales, told investors Feb. 26 that it had $640.5 million in liabilities associated with closing the mines. That’s almost three times as much as the company is worth.

For Arch Coal Inc., which hasn’t made a profit since 2011, the figure is $418 million as of Dec. 31.

 

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